Long Memory Affine Term Structure Models

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Publication details

JournalJournal of Econometrics
DateAccepted/In press - 25 Sep 2015
DateE-pub ahead of print - 19 Oct 2015
DatePublished (current) - Mar 2016
Issue number1
Volume191
Number of pages24
Pages (from-to)33-56
Early online date19/10/15
Original languageEnglish

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.

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© 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 details

    Research areas

  • C32, C58, JEL classification G12

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