Evaluating an Alternative Risk Preference in Affine Term Structure Models
- 15 October 2003
- journal article
- Published by Oxford University Press (OUP) in The Review of Financial Studies
- Vol. 17 (2) , 379-404
- https://doi.org/10.1093/rfs/hhg046
Abstract
Dai and Singleton (2002) and Duffee (2002) show that there is a tension in affine term structure models between matching the mean and the volatility of interest rates. This article examines whether this tension can be solved by an alternative parametrization of the price of risk. The empirical evidence suggests that, first, the examined parametrization is not sufficient to solve the mean-volatility tension. Second, the usual result in the estimation of affine models, indicating that some of the state variables are extremely persistent, may have been caused by the lack of flexibility in the parametrization of the price of risk.Keywords
All Related Versions
This publication has 10 references indexed in Scilit:
- Term Structure Dynamics in Theory and RealityThe Review of Financial Studies, 2003
- Term Premia and Interest Rate Forecasts in Affine ModelsThe Journal of Finance, 2002
- Expectation puzzles, time-varying risk premia, and affine models of the term structureJournal of Financial Economics, 2002
- Quadratic Term Structure Models: Theory and EvidenceThe Review of Financial Studies, 2002
- Who Should Buy Long-Term Bonds?American Economic Review, 2001
- Specification Analysis of Affine Term Structure ModelsThe Journal of Finance, 2000
- A YIELD‐FACTOR MODEL OF INTEREST RATESMathematical Finance, 1996
- Some Lessons from the Yield CurveJournal of Economic Perspectives, 1995
- Maximum Likelihood Estimation for a Multifactor Equilibrium Model of the Term Structure of Interest RatesThe Journal of Fixed Income, 1993
- An equilibrium characterization of the term structureJournal of Financial Economics, 1977