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http://hdl.handle.net/2451/27081
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| Title: | Specification Analysis of Affine Term Structure Models |
| Authors: | Dai, Qiang
Singleton, Kenneth J. |
| Issue Date: | 27-Oct-1998 |
| Series/Report no.: | FIN-98-083 |
| Abstract: | In this paper, we explore the features of affine term structure models
that are empirically important for explaining the joint distribution of
yields on short and long-term interest rate swaps. We begin by showing
that the family of N-factor affine models can be classified into N+1
non-nested sub-families of models. For each sub-family, we derive a
maximal model with the property that every admissible member of this
family is equivalent to or a nested special case of our maximal model.
Second, using our classification scheme and maximal models, we show that
many of the three-factor models in the literature impose potentially
strong over-identifying restrictions on the joint distribution of short-
and long-term rates. Third, we compute simulated method-of-moments
estimates for several members of one of the four branches of
three-factor models, and test the over-identifying restrictions implied
by these models. We conclude that many of the extant affine models in
the literature fail to describe important features of the distribution
of long- and short- term rates. The source of the model misspecification
is shown to be overly strong restrictions on the correlations among the
state variables. Relaxing these restrictions leads to a model that
passes several goodness-of-fit tests over our sample period. |
| URI: | http://hdl.handle.net/2451/27081 |
| Appears in Collections: | Finance Working Papers
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