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Title
A Term Structure Model of Interest Rates with Quadratic Volatility
Creator
Creator Name
TAKAMIZAWA, Hideyuki TAKAMIZAWA, Hideyuki
高見澤, 秀幸 高見澤, 秀幸
Affiliation
Affiliation Name
Hitotsubashi University
Key Word
Term structure
Interest rate
Volatility
Affine model
Prediction
JEL
C58
E43
G12
G17
Abstract
This study proposes a no-arbitrage term structure model that can capture the volatility of interest rates without sacrificing the goodness-of-_t to the cross-section and predictive ability about the level of interest rates. The key feature of the model is the covariance matrix of changes in factors, which is specified as quadratic functions of factors. The quadratic specification can capture intense volatility even with spanned factors, which is not the case for the affine specification. Furthermore, since the quadratic specification guarantees the positive definiteness of the covariance matrix without restricting the sign of factors, it allows for a flexible specification of the physical drift as does the Gaussian term structure model, contributing also to accurate level prediction.
Description
This draft: December 9, 2017
Publisher
Hitotsubashi University Center for Financial Research
Issued Date
2017-12-09
Language
英語(eng)
Resource Type
technical report（テクニカルレポート）
Version Type
VoR
Relation - Is Part Of
Related Title
Working Paper Series ; No. G-1-18
Number of Pages
52
Appears in Collections
Working Paper Series / Hitotsubashi University Center for Financial Research
URL
https://hdl.handle.net/10086/28986