CFE 2017: Start Registration
View Submission - CFE
A1458
Title: A macro-finance term structure model with volatility-induced stationarity Authors:  Anne Hansen - University of Copenhagen and Danmarks Nationalbank (Denmark) [presenting]
Abstract: A novel model of the term structure of interest rates, in which mean-reversion is induced through level-dependent conditional volatility, is proposed. The model overcomes two well-known drawbacks that are inherent in affine term structure models (ATSMs). One is a trade-off between time-varying conditional variances and flexible correlations of the risk factors, which arises when imposing parameter restrictions that ensure positive definite covariance matrices. Another is a sharp distinction between unit root and stationary dynamics; features that appear to be reconciled in US Treasury bond data. An empirical macro-finance application is presented. In comparison with the Gaussian ATSM, the volatility-induced stationary model (i) captures time-varying conditional yield volatility; (ii) estimates economically plausible and stable term premia; and (iii) obtains low fitting errors.