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This paper explores the structural differences and relative goodness-of-fits of af-fine term structure models ~ATSMs!. Within the family of ATSMs there is a trade-off between f lexibility in modeling the conditional correlations and volatilities of the risk factors. This trade-off is formalized by our classification of N-factor affine family into N ϩ 1(More)
and may be freely reproduced for educational and research purposes, so long as it is not altered, this copyright notice is reproduced with it, and it is not sold for profit. Abstract: Despite powerful advances in yield curve modeling in the last twenty years, comparatively little attention has been paid to the key practical problem of forecasting the yield(More)
This article presents convenient reduced-form models of the valuation of contingent claims subject to default risk, focusing on applications to the term structure of interest rates for corporate or sovereign bonds. Examples include the valuation of a credit-spread option. This article presents a new approach to modeling term structures of bonds and other(More)
I find that the standard class of affine 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(More)
How Much of the Corporate-Treasury Yield Spread Is Due to Credit Risk? No consensus has yet emerged from the existing credit risk literature on how much of the observed corporate-Treasury yield spreads can be explained by credit risk. In this paper, we propose a new calibration approach based on historical default data and show that one can indeed obtain(More)
Though linear projections of returns on the slope of the yield curve have contradicted the implications of the traditional " expectations theory, " we show that these findings are not puzzling relative to a large class of richer dynamic term structure models. Specifically, we are able to match all of the key empirical findings reported by Fama and Bliss and(More)
extensive discussions; Andrew Ang, Mark Ferguson, and Yael Hochberg for their thoughtful and careful research assistance, three referees for their constructive comments, and the Financial Research Initiative and Gifford Fong Associates Fund of the Graduate School of Business at Stanford University for financial support.
Although traded as distinct products, caps and swaptions are linked by no-arbitrage relations through the correlation structure of interest rates. Using a string market model framework, we solve for the correlation matrix implied by the swaptions market and examine the relative valuation of caps and swaptions. The results indicate that swaption prices are(More)
This paper develops and empirically implements an arbitrage-free, dynamic term structure model with " priced " factor and regime-shift risks. The risk factors are assumed to follow a discrete-time Gaussian process, and regime shifts are governed by a discrete-time Markov process with state-dependent transition probabilities. This model gives closed-form(More)