Interest Rates with Long Memory: A Generalized Affine Term-Structure Model

Daniela Osterrieder ()
Additional contact information
Daniela Osterrieder: Aarhus University and CREATES, Postal: Department of Economics and Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We propose a model for the term structure of interest rates that is a generalization of the discrete-time, Gaussian, affine yield-curve model. Compared to standard affine models, our model allows for general linear dynamics in the vector of state variables. In an application to real yields of U.S. government bonds, we model the time series of the state vector by means of a co-fractional vector autoregressive model. The implication is that yields of all maturities exhibit nonstationary, yet mean-reverting, long-memory behavior of the order d ˜ 0.87. The long-run dynamics of the state vector are driven by a level, a slope, and a curvature factor that arise naturally from the co-fractional modeling framework. We show that implied yields match the level and the variability of yields well over time. Studying the out-of-sample forecasting accuracy of our model, we find that our model results in good yield forecasts that outperform several benchmark models, especially at long forecasting horizons.

Keywords: term structure of interest rates; fractional integration and cointegration; affine models (search for similar items in EconPapers)
JEL-codes: C32 C58 G12 (search for similar items in EconPapers)
Pages: 46
Date: 2013
New Economics Papers: this item is included in nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://repec.econ.au.dk/repec/creates/rp/13/rp13_17.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2013-17

Access Statistics for this paper

More papers in CREATES Research Papers from Department of Economics and Business Economics, Aarhus University
Bibliographic data for series maintained by ().