Term Premia and Interest Rate Forecasts in Affine Models

Gregory R. Duffee

doi:10.1111/1540-6261.00426

Term Premia and Interest Rate Forecasts in Affine Models

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Gregory R. Duffee

書誌事項

公開日: 2002-02

権利情報

http://onlinelibrary.wiley.com/termsAndConditions#vor

DOI

10.1111/1540-6261.00426

公開者: Wiley

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説明

<jats:title>ABSTRACT</jats:title><jats:p>The standard class of affine models produces poor forecasts of future 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: Compensation for risk is a multiple of the variance of the risk. Thus risk compensation cannot vary independently of interest rate volatility. I also describe a broader class of models. These aessentially affine‐ models retain the tractability of standard models, but allow compensation for interest rate risk to vary independently of interest rate volatility. This additional flexibility proves useful in forecasting future yields.</jats:p>