IDEAS home Printed from https://ideas.repec.org/a/pal/risman/v27y2025i4d10.1057_s41283-025-00178-4.html
   My bibliography  Save this article

Affine term structure models with Garch volatility

Author

Listed:
  • Marco Realdon

    (KIMEP)

Abstract

Investors care about the probability density of tomorrow’s Government bond yields, which is known to exhibit Garch-type conditional heteroscedasticity, but the literature on term structure models has largely avoided this issue. This paper addresses this issue through discrete time affine term structure models (DTATSM) that predict the conditional density of daily US and Euro Government bond yields and mimic the Garch-type volatility of such yields. Yields can be homoscedastic under the risk-neutral measure Q and Garch heteroscedastic under the real measure P, so that Garch heteroscedasticity is not spanned by bond prices. Thanks to more realistic predictions of daily yields volatility, the empirical evidence from US and Euro yields favours such unspanned Garch-heteroscedastic DTATSM over popular homoscedastic DTATSM and over stochastic volatility DTATSM. This result only requires a univariate unspanned Garch volatility process that aggregates the squared shocks of all the factors driving the short rate.

Suggested Citation

  • Marco Realdon, 2025. "Affine term structure models with Garch volatility," Risk Management, Palgrave Macmillan, vol. 27(4), pages 1-33, December.
    • Handle: RePEc:pal:risman:v:27:y:2025:i:4:d:10.1057_s41283-025-00178-4
    DOI: 10.1057/s41283-025-00178-4
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s41283-025-00178-4
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1057/s41283-025-00178-4?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:risman:v:27:y:2025:i:4:d:10.1057_s41283-025-00178-4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.