Empirical performance of Gaussian affine dynamic term structure models in the presence of autocorrelation misspecification bias

Januj Juneja ()
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Januj Juneja: San Diego State University

Review of Quantitative Finance and Accounting, 2018, vol. 50, issue 3, No 2, 695-715

Abstract: Abstract Recently, several authors have documented the presence of estimation bias in Gaussian affine dynamic term structure models (GADTSM). However, only a few applications involving its impact on the empirical performance of GADTSM exist in the extant literature, and these studies focus solely on discrete-time vector autoregressive (VAR) based GADTSM and concentrate on issues of small-sample bias and persistence. In this paper, we provide a comprehensive investigation of this issue that includes the estimation of both discrete-time VAR based GADTSM and continuous-time GADTSM at multiple data frequencies through a unique empirical design and two Monte Carlo simulation experiments, within which we construct estimation bias from the serial correlation in yield pricing errors. Our findings show that, although, empirical performance of all studied GADTSM are severely impacted by estimation bias, discrete-time GADTSM are more severely impacted by estimation bias than continuous-time GADTSM. Building on theoretical arguments developed in previous works, we attribute this finding to the strong dependence of discrete-time VAR based GADTSM on the ordinary least squares econometric technique relative to the continuous-time GADTSM for which general maximum likelihood estimation is more suitable.

Keywords: Dynamic term structure model; Autocorrelation misspecification; Estimation bias; Model performance (search for similar items in EconPapers)
JEL-codes: C52 C58 E43 E47 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11156-017-0643-z

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