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Affine Term Structure Constraints on Euribor data

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  • Giulio Tarditi

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Abstract

This article discusses some modifications to non arbitrage models described by an Ornstein- Uhlenbeck latent process and an affine dynamic system. The empirical analysis refers to Euribor rates, due to the leading role they have in financial markets, but also to help the replicability of the results due to their accessibility and gratuitous nature. The benchmark model belongs to the class of Affine Term Structure Models (ATSM), whom owe their popularity to the success of Duffie and Kan (1996). Nodes have been calculated recursively through the use of the Kalman filter, and hence have the corresponding bayesian interpretation. The proposals differ from traditional models on some constraints posed on certain model specifications that allow to identify different aspects of the term structure. Through a clear identification of the type of contribution that each factor can undertake, it is possible to define probabilistic structures with minimal residuals purified from the dominant systematic residues visible in classic model residuals. Term Structure properties seem to be be identified with greater precision, which in the authors opinion justifies the relaxation of the hypothesis due to the additional constraints. The empirical analysis tries to convey such findings, and reminds of possible evolving paths of this line of work, such as a different specification of the transition process or the relaxation of linear and gaussian nature.

Suggested Citation

  • Giulio Tarditi, 2011. "Affine Term Structure Constraints on Euribor data," Department of Economics University of Siena 613, Department of Economics, University of Siena.
  • Handle: RePEc:usi:wpaper:613
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    References listed on IDEAS

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    1. F. A. Lutz, 1940. "The Structure of Interest Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 55(1), pages 36-63.
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    7. Qiang Dai & Kenneth J. Singleton, 2000. "Specification Analysis of Affine Term Structure Models," Journal of Finance, American Finance Association, vol. 55(5), pages 1943-1978, October.
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    14. LeRoy,Stephen F. & Werner,Jan, 2014. "Principles of Financial Economics," Cambridge Books, Cambridge University Press, number 9781107024120, February.
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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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