Estimation of affine term structure models with spanned or unspanned stochastic volatility

Drew Creal and Jing Cynthia Wu

Journal of Econometrics, 2015, vol. 185, issue 1, 60-81

Abstract: We develop new procedures for maximum likelihood estimation of affine term structure models with spanned or unspanned stochastic volatility. Our approach uses linear regression to reduce the dimension of the numerical optimization problem yet it produces the same estimator as maximizing the likelihood. It improves the numerical behavior of estimation by eliminating parameters from the objective function that cause problems for conventional methods. We find that spanned models capture the cross-section of yields well but not volatility while unspanned models fit volatility at the expense of fitting the cross-section.

Keywords: Affine term structure models; Unspanned stochastic volatility; Estimation (search for similar items in EconPapers)
JEL-codes: C32 E32 E43 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (34)

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Related works:
Working Paper: Estimation of Affine Term Structure Models with Spanned or Unspanned Stochastic Volatility (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:185:y:2015:i:1:p:60-81

DOI: 10.1016/j.jeconom.2014.10.003

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