Specification Analysis of Affine Term Structure Models
This paper characterizes, interprets, and tests the over-identifying restrictions imposed in affine models of the term" structure. Letting r(t) = ë Y(t), where Y is an unobserved vector affine process, our analysis proceeds in three steps. First, we show that affine models can be categorized according to the different over-identifying restrictions they impose on (i) ë, and (ii) the parameters of the diffusion matrices. Second, this formulation is shown to be equivalent to a model in which there is a terraced drift structure with one of the state variables being the stochastic long-run mean of r. This equivalence allows direct comparisons of the substantive restrictions on the dynamics of interest rates imposed in CIR-style models and models in which the state variables are the stochastic long-run mean and volatility of r. Third, we compute simulated method of moments estimates of a three-factor affine term structure model, and test the over-identifying restrictions on the joint distribution of long- and short-term interest rates implied by extant affine models of r. We find allowing for correlated factors is key to simultaneously describing the short and long ends of the yield curve. This finding is interpreted in terms of the properties of the risk factors underlying term structure movements.
|Date of creation:||Aug 1997|
|Date of revision:|
|Publication status:||published as Dai, Qiang and Kenneth J. Singleton. "Specification Analysis Of Affine Term Structure Models," Journal of Finance, 2000, v55(5,Oct), 1943-1978.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.orgEmail:
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Pierluigi Balduzzi & Sanjiv Das & Silverio Foresi, 1996.
"The Central Tendency: A Second Factor in Bond Yields,"
New York University, Leonard N. Stern School Finance Department Working Paper Seires
96-12, New York University, Leonard N. Stern School of Business-.
- Pierluigi Balduzzi & Sanjiv Ranjan Das & Silverio Foresi, 1998. "The Central Tendency: A Second Factor In Bond Yields," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 62-72, February.
- Pierluigi Balduzzi & Sanjiv Ranjan Das & Silverio Foresi, 1997. "The Central Tendency: A Second Factor in Bond Yields," NBER Working Papers 6325, National Bureau of Economic Research, Inc.
- David K. Backus & Stanley E. Zin, 1994.
"Reverse Engineering the Yield Curve,"
NBER Working Papers
4676, National Bureau of Economic Research, Inc.
- Gallant, A. Ronald & Tauchen, George, 1996.
"Which Moments to Match?,"
Cambridge University Press, vol. 12(04), pages 657-681, October.
- David Backus & Silverio Foresi & Chris Telmer, 1996.
"Affine Models of Currency Pricing,"
NBER Working Papers
5623, National Bureau of Economic Research, Inc.
- David Backus & Silverio Foresi & Chris Telmer, 1996. "Affine Models of Currency Pricing," New York University, Leonard N. Stern School Finance Department Working Paper Seires 96-9, New York University, Leonard N. Stern School of Business-.
- Ait-Sahalia, Yacine, 1996.
"Testing Continuous-Time Models of the Spot Interest Rate,"
Review of Financial Studies,
Society for Financial Studies, vol. 9(2), pages 385-426.
- Yacine Ait-Sahalia, 1995. "Testing Continuous-Time Models of the Spot Interest Rate," NBER Working Papers 5346, National Bureau of Economic Research, Inc.
- repec:cup:etheor:v:12:y:1996:i:4:p:657-81 is not listed on IDEAS
- Newey, Whitney K & West, Kenneth D, 1987. "Hypothesis Testing with Efficient Method of Moments Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 777-87, October.
- Hansen, Lars Peter & Richard, Scott F, 1987. "The Role of Conditioning Information in Deducing Testable," Econometrica, Econometric Society, vol. 55(3), pages 587-613, May.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:6128. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.