Analyzing interest rate risk: Stochastic volatility in the term structure of government bond yields

Nikolaus Hautsch and Yangguoyi Ou

No 2009/03, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: We propose a Nelson-Siegel type interest rate term structure model where the underlying yield factors follow autoregressive processes with stochastic volatility. The factor volatilities parsimoniously capture risk inherent to the term structure and are associated with the time-varying uncertainty of the yield curve's level, slope and curvature. Estimating the model based on U.S. government bond yields applying Markov chain Monte Carlo techniques we find that the factor volatilities follow highly persistent processes. We show that slope and curvature risk have explanatory power for bond excess returns and illustrate that the yield and volatility factors are closely related to industrial capacity utilization, inflation, monetary policy and employment growth.

Keywords: Term Structure Modelling; Yield Curve Risk; Stochastic Volatility; Factor Models; Macroeconomic Fundamentals (search for similar items in EconPapers)
JEL-codes: C5 E4 G1 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Analyzing interest rate risk: Stochastic volatility in the term structure of government bond yields (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:200903

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