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Can Affine Models Match the Moments in Bond Yields?

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  • Peter Feldhütter

    (London Business School, Regent’s Park, London, NW1 4SA, United Kingdom)

Abstract

This paper examines the ability of three-factor affine term structure models with essentially, extended, and semi-affine risk premium specifications to capture the dynamics of bond excess returns, yield volatility and higher order moments in yields. Extended affine models can best capture the time-variation in excess returns and yield volatility simultaneous. However, none of the three-factor models can fully match bond return predictability and yield volatility jointly. Extended affine models are more restricted in the ability to price bonds because of necessary parameter restrictions — the so-called Feller condition — and essentially affine and semi-affine models are therefore better suited for pricing purposes.

Suggested Citation

  • Peter Feldhütter, 2016. "Can Affine Models Match the Moments in Bond Yields?," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 6(02), pages 1-56, June.
    • Handle: RePEc:wsi:qjfxxx:v:06:y:2016:i:02:n:s2010139216500099
    DOI: 10.1142/S2010139216500099
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