Discrete-time affine term structure models: an ARCH formulation
by Alessandro Carta, Dean Fantazzini, Mario A. Maggi
International Journal of Risk Assessment and Management (IJRAM), Vol. 11, No. 1/2, 2009

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.

Online publication date: Mon, 22-Dec-2008

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