Abstract
We develop a Gaussian discrete time essentially affine term structure model with long memory state variables. This feature reconciles the strong persistence observed in nominal yields and inflation with the theoretical implications of affine models, especially for long maturities. We characterize in closed-form the dynamic and cross-sectional implications of long memory for our model. We explain how long memory can naturally arise within the term structure of interest rates, providing a theoretical underpinning for our model. Despite the infinite-dimensional structure that long memory implies, we show how to cast the model in state space and estimate it by maximum likelihood. An empirical application of our model is presented.
| Original language | English |
|---|---|
| Pages (from-to) | 33-56 |
| Number of pages | 24 |
| Journal | Journal of Econometrics |
| Volume | 191 |
| Issue number | 1 |
| Early online date | 19 Oct 2015 |
| DOIs | |
| Publication status | Published - Mar 2016 |
Bibliographical note
© 2015 Elsevier B.V. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for detailsKeywords
- C32
- C58
- JEL classification G12
