Yield-factor volatility models - HEC Paris - École des hautes études commerciales de Paris Access content directly
Journal Articles Journal of Banking and Finance Year : 2007

Yield-factor volatility models

Abstract

The term structure of interest rates is often summarized using a handful of yield factors that capture shifts in the shape of the yield curve. In this paper, we develop a comprehensive model for volatility dynamics in the level, slope, and curvature of the yield curve that simultaneously includes level and GARCH effects along with regime shifts. We show that the level of the short rate is useful in modeling the volatility of the three yield factors and that there are significant GARCH effects present even after including a level effect. Further, we find that allowing for regime shifts in the factor volatilities dramatically improves the model's fit and strengthens the level effect. We also show that a regime-switching model with level and GARCH effects provides the best out-of-sample forecasting performance of yield volatility. We argue that the auxiliary models often used to estimate term structure models with simulation-based estimation techniques should be consistent with the main features of the yield curve that are identified by our model.

Domains

Dates and versions

hal-00461067 , version 1 (03-03-2010)

Identifiers

Cite

Christophe Pérignon, Daniel R. Smith. Yield-factor volatility models. Journal of Banking and Finance, 2007, Vol.31,n°10, pp.3125-3144. ⟨10.1016/j.jbankfin.2006.11.016⟩. ⟨hal-00461067⟩

Collections

HEC CNRS
31 View
0 Download

Altmetric

Share

Gmail Facebook X LinkedIn More