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

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  • Creal, Drew D.
  • Wu, Jing Cynthia
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.

Suggested Citation

  • Creal, Drew D. & Wu, Jing Cynthia, 2015. "Estimation of affine term structure models with spanned or unspanned stochastic volatility," Journal of Econometrics, Elsevier, vol. 185(1), pages 60-81.
    • Handle: RePEc:eee:econom:v:185:y:2015:i:1:p:60-81
    DOI: 10.1016/j.jeconom.2014.10.003
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    More about this item

    Keywords

    Affine term structure models; Unspanned stochastic volatility; Estimation;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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