Risk Premia and Volatilities in a Nonlinear Term Structure Model

Peter Feldhütter, Christian Heyerdahl-Larsen, Philipp Illeditsch

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Abstrakt

We introduce a reduced-form term structure model with closed-form solutions for yields where the short rate and market prices of risk are nonlinear functions of Gaussian state variables. The nonlinear model with three factors matches the time-variation in expected excess returns and yield volatilities of US Treasury bonds from 1961 to 2014. Yields and their variances depend on only three factors, yet the model exhibits features consistent with Unspanned Risk Premia (URP) and Unspanned Stochastic Volatility (USV).
OriginalsprogEngelsk
TidsskriftReview of Finance
Vol/bind22
Udgave nummer1
Sider (fra-til)337–380
Antal sider44
ISSN1572-3097
DOI
StatusUdgivet - feb. 2018

Emneord

  • Nonlinear term structure models
  • Expected excess returns
  • Stochastic volatility
  • Unspanned risk premia
  • Unspanned stochastic volatility

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