Stochastic Volatility and Mean Drift in the Short Rate Diffusion : Sources of Steepness , Level and Curvature in the Yield Curve

@inproceedings{Andersen1998StochasticVA,
  title={Stochastic Volatility and Mean Drift in the Short Rate Diffusion : Sources of Steepness , Level and Curvature in the Yield Curve},
  author={Torben G. Andersen and Jesper Lund},
  year={1998}
}
The paper demonstrates that it is possible to capture all main structural features of the short-rate diffusion, i.e., the complex conditional heteroskedasticity and the autocorrelation patterns, in an intuitively appealing and fairly manageable nonlinear, three-factor model. The factors are the short rate itself, the log-volatility of the diffusion, and a time-varying, but stationary, mean level towards which the short rate reverts. The additional two factors effectively extend the (generalized… CONTINUE READING

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