Long and short memory in dynamic term structure models

Salman Huseynov ()
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Salman Huseynov: Aarhus University, Department of Economics and Business Economics and CREATES, Postal: Fuglesangs Allé 4, 8210 Aarhus V, Denmark

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

Abstract: I provide a unified theoretical framework for long memory term structure models and show that the recent state-space approach suffers from a parameter identification problem. I propose a different framework to estimate long memory models in a state-space setup, which addresses the shortcomings of the existing approach. The proposed framework allows asymmetrically treating the physical and risk-neutral dynamics, which simplifies estimation considerably and helps to conduct an extensive comparison with standard term structure models. Relying on a battery of tests, I find that standard term structure models perform just as well as the more complicated long memory models and produce plausible term premium estimates.

Keywords: Dynamic term structure models; Long memory; Affine model; Shadow rate model (search for similar items in EconPapers)
JEL-codes: C32 E43 G12 (search for similar items in EconPapers)
Pages: 46
Date: 2021-12-20
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-mac and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2021-15

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