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- W3125872230 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. Term structure models have several uses, including pricing fixed-income derivatives, managing the risk of fixed-income portfolios, and detecting relationships between the term structure of interest rates and macrovariables such as inflation and consumption. To perform well in these tasks, term structure models must be numerically and econometrically tractable while matching the empirical properties of the term structure movements. At least two empirical properties of the term structure of interest rates have been well established by financial economists over the years [see Dai and Singleton (2003) for a survey]. First, the term premium, or the expected excess return of Treasury bonds, has a high time variability. Second, the volatility of interest rates is time varying. These two properties are so prominent in the data that they will be referred to as stylized facts. While these two stylized facts are very well established in the empirical literature, affine term structure models are thoroughly discussed in the theoretical literature. Affine models are those in which the yield of zero coupon bonds are affine functions of the model state variables. Classic" @default.
- W3125872230 created "2021-02-01" @default.
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- W3125872230 date "2003-10-01" @default.
- W3125872230 modified "2023-09-27" @default.
- W3125872230 title "Evaluating an Alternative Risk Preference in Affine Term Structure Models" @default.
- W3125872230 hasPublicationYear "2003" @default.
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