Specification Analysis of Affine Term Structure Models
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- 1 October 2000
- journal article
- Published by Wiley in The Journal of Finance
- Vol. 55 (5) , 1943-1978
- https://doi.org/10.1111/0022-1082.00278
Abstract
This paper explores the structural differences and relative goodness‐of‐fits of affine term structure models (ATSMs). Within the family of ATSMs there is a trade‐off between flexibility in modeling the conditional correlations and volatilities of the risk factors. This trade‐off is formalized by our classification of N‐factor affine family into non‐nested subfamilies of models. Specializing to three‐factor ATSMs, our analysis suggests, based on theoretical considerations and empirical evidence, that some subfamilies of ATSMs are better suited than others to explaining historical interest rate behavior.Keywords
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