Discrete-time affine term structure models: an ARCH formulation

Authors: Carta, Alessandro¹; Fantazzini, Dean²; Maggi, Mario A.³

Source: International Journal of Risk Assessment and Management, Volume 11, Numbers 1-2, 22 December 2008 , pp. 164-179(16)

Publisher: Inderscience Publishers

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Abstract:

Discrete-time affine term structure models can be expressed in AR(1)-ARCH form but it is not possible to get a non-negative variance equation only by restricting the parameters. In this paper, we use distribution assumption in order to assure the variance to be non-negative. We present a complete formulation for one-factor and multi-factor models with inverse Gaussian conditional innovations distribution. Moreover, we derive the log-likelihood functions and implement a two-factor empirical specification analysis, both with simulated and US interest rate data. We compare the estimation and forecasting results with a AR(1)-GARCH(1,1) model.

Keywords: RISK, SAFETY AND EMERGENCY JOURNALS; Risk, Reliability and Safety; Security and Emergency Management

Document Type: Research article

DOI: http://dx.doi.org/10.1504/IJRAM.2009.022203

Affiliations: 1: Department of Statistics, University of Warwick, CV4 97L, Coventry, UK. 2: Moscow School of Economics, Moscow State University, 1, Building 61, Leninskie Gory, Moscow, Russia. 3: Facolta di Economia, Universita

Publication date: 2008-12-22

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