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Can Affine Models Match the Moments in Bond Yields?

Peter Feldhütter ()
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Peter Feldhütter: London Business School, Regent’s Park, London, NW1 4SA, United Kingdom

Quarterly Journal of Finance (QJF), 2016, vol. 06, issue 02, 1-56

Abstract: This paper examines the ability of three-factor affine term structure models with essentially, extended, and semi-affine risk premium specifications to capture the dynamics of bond excess returns, yield volatility and higher order moments in yields. Extended affine models can best capture the time-variation in excess returns and yield volatility simultaneous. However, none of the three-factor models can fully match bond return predictability and yield volatility jointly. Extended affine models are more restricted in the ability to price bonds because of necessary parameter restrictions — the so-called Feller condition — and essentially affine and semi-affine models are therefore better suited for pricing purposes.

Keywords: Affine term structure models; market price of risk; time-varying risk premium; time-varying volatility; Feller condition (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1142/S2010139216500099

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