Identification Of Maximal Affine Term Structure Models

Download or read book Identification of Maximal Affine Term Structure Models written by Pierre Collin-Dufresne and published by . This book was released on 2011 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: Building on the approach of Duffie and Kan (1996) who use finite maturity yields as the state vector, we propose a new representation of affine models in which the state vector is composed of infinitesimal maturity yields and their quadratic covariations. Because these variables possess unambiguous economic interpretations, they generate a representation that is globally identifiable. Further, this representation is more flexible than the maximal model of Dai and Singleton (2000) in that there are more identifiable parameters. We implement this new representation for two different three-factor models. The fact that our state vector can be estimated model-independently from yield curve data presents advantages for the estimation and interpretation of multi-factor models.