Re-specification of Affine Term Structure Models: The Linkage to Empirical Investigations

Ting Ting Huang, Bruce Qiang Sun and Xinfu Chen
Authors registered in the RePEc Author Service: Tina T Swan

Applied Mathematical Finance, 2014, vol. 21, issue 6, 523-554

Abstract: This paper specifies the dynamic and cross-sectional behaviour of bonds in the framework of the general affine term structure model (ATSM) of Duffie and Kan (1996, A yield-factor model of interest rate. Mathematical Finance, 6 , 379-406). We present the calibrations of ATSM, with the numerics fitting in with the actual data under the physical probability measure. Without assumptions and restrictions on any specific physical process of the factors, we find theoretical loads by solving Riccati equations with parameters chosen for the solution to match those from the principal component models. The general condition on the boundary is satisfied; so, the Black-Scholes equation admits a unique solution, which supports the Condition of Duffie and Kan.

Date: 2014
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DOI: 10.1080/1350486X.2014.896510

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