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Term Premia and Interest Rate Forecasts in Affine Models (2001)
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@MISC{Duffee01termpremia,
author = {Gregory R. Duffee and Jonathan Berk and Rob Bliss and Qiang Dai and Darrell Duffie},
title = {Term Premia and Interest Rate Forecasts in Affine Models},
year = {2001}
}
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Abstract
I find that the standard class of a#ne models produces poor forecasts of future changes in Treasury yields. Better forecasts are generated by assuming that yields follow random walks. The failure of these models is driven by one of their key features: The compensation that investors receive for facing risk is a multiple of the variance of the risk. This means that risk compensation cannot vary independently of interest rate volatility. I also describe and empirically estimate a class of models that is broader than the standard a#ne class. These "essentially a#ne" models retain the tractability of the usual models, but allow the compensation for interest rate risk to vary independently of interest rate volatility. This additional flexibility proves useful in forming accurate forecasts of future yields. Address correspondence to the University of California, Haas School of Business, 545 Student Services Building #1900, Berkeley, CA 94720. Phone: 510-642-1435. Email address: du#ee@haas.b...
Keyphrases
term premia interest rate forecast affine model ne model interest rate volatility risk compensation cannot ne class yield follow random walk interest rate risk usual model key feature du ee haas treasury yield future change future yield accurate forecast email address address correspondence haas school standard class student service building poor forecast additional flexibility
