Yield-factor volatility models - HEC Paris - École des hautes études commerciales de Paris Accéder directement au contenu
Article Dans Une Revue Journal of Banking and Finance Année : 2007

Yield-factor volatility models

Résumé

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 GARCH 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 GARCH 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 GARCH 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.

Domaines

Dates et versions

hal-00461067 , version 1 (03-03-2010)

Identifiants

Citer

Christophe Pérignon, Daniel R. Smith. Yield-factor volatility models. Journal of Banking and Finance, 2007, Vol.31,n°10, pp.3125-3144. ⟨10.1016/j.jbankfin.2006.11.016⟩. ⟨hal-00461067⟩

Collections

HEC CNRS
31 Consultations
0 Téléchargements

Altmetric

Partager

Gmail Facebook X LinkedIn More