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http://hdl.handle.net/2451/26498
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| Title: | Term Structure Dynamics in Theory and Reality |
| Authors: | Dai, Qiang
Singleton, Kenneth |
| Issue Date: | 18-Jul-2002 |
| Series/Report no.: | FIN-02-054 |
| Abstract: | This paper is a critical survey of models designed for pricing fixed
income securities and their associated term structures of market yields.
Our primary focus is on the interplay between the theoretical
specification of dynamic term structure models and their empirical fit
to historical changes in the shapes of yield curves. We begin by over
viewing the dynamic term structure models that have been fit to treasury
or swap yield curves and in which the risk factors follow diffusions,
jump-diffusion, or have \switching regimes." Then the goodness-of-
ts of these models are assessed relative to their abilities to: (i)
match linear projections of changes in yields onto the slope of the
yield curve; (ii) match the persistence of conditional volatilities, and
the shapes of term structures of unconditional volatilities, of yields;
and (iii) to reliably price caps, swaptions, and other fixed-income
derivatives. For the case of defaultable securities we explore the
relative ts to historical yield spreads. |
| URI: | http://hdl.handle.net/2451/26498 |
| Appears in Collections: | Finance Working Papers
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