Yield-factor volatility models

doi:10.1016/j.jbankfin.2006.11.016

Yield-factor volatility models

2007-10-01

10

PRE

AI

C

Christophe Pérignon *

D

Daniel R. Smith

DOI：10.1016/j.jbankfin.2006.11.016

Original

Original request for help

Save

Abstract

En 中文

The term structure of interest rates is often summarized using a handful of yield factors that capture shifts in the shape of the yield curve. In this paper, we develop a comprehensive model for volatility dynamics in the level, slope, and curvature of the yield curve that simultaneously includes level and LARCH effects along with regime shifts. We show that the level of the short rate is useful in modeling the volatility of the three yield factors and that there are significant LARCH effects present even after including a level effect. Further, we find that allowing for regime shifts in the factor volatilities dramatically improves the model's fit and strengthens the level effect. We also show that a regime-switching model with level and LARCH effects provides the best out-of-sample forecasting performance of yield volatility. We argue that the auxiliary models often used to estimate term structure models with simulation-based estimation techniques should be consistent with the main features of the yield curve that are identified by our model. (C) 2007 Elsevier B.V. All rights reserved.

Keywords:

yields

GARCH

level effect

regime shifts

Yield-factor volatility models

Abstract

Journal

Organization