Change-Points in Affine Arbitrage-Free Term Structure Models

Complete Characterisation of Arbitrage Free Affine Term Structure Models

It is widely believed that the results in Duffie and Kan (1996) provide the necessary and sufficient conditions for a multifactor model of the term structure of interest rates to admit an affine representation. It is shown here that, in fact, only sufficient conditions are given by Duffie and Kan, and there are families of affine models that do not fall into the Duffie-Kan characterisation. A m...

Forecasting the Yield Curve using Priors from No Arbitrage Affine Term Structure Models

In this paper we propose a strategy for forecasting the term structure of interest rates which may produce significant gains in predictive accuracy. The key idea is to use the restrictions implied by Affine Term Structure Models (ATSM) on a vector autoregression (VAR) as prior information rather than imposing them dogmatically. This allows to account for possible model misspecification. We appl...

Extracting Expectations in Affine Term Structure Models

In this paper, we study the problem of implementation of Ross (2015) Recovery theorem to disentangle the pricing kernel and physical probabilities from observed bond yields within discrete time affine term structure models. As a remedy to the problem of obtaining Arrow-Debreu prices of state transitions, we propose Markov chain approximation to autoregressive processes. Our work suggests that a...

Review of Continuous-Time Term-Structure Models Part II: Arbitrage-Free Models

Specification Analysis of Affine Term Structure Models

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 tradeoff 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 N + 1 non-nested subfamilies of models. Specializin...