Risk Premia and Volatilities in a Nonlinear Term Structure Model

We introduce a reduced-form term structure model with closed-form solutions for yields where the short rate and market prices of risk are nonlinear functions of Gaussian state variables. The nonlinear model with three factors matches the time-variation in expected excess returns and yield volatilities of US Treasury bonds from 1961 to 2014. Yields and their variances depend on only three factors, yet the model exhibits features consistent with Unspanned Risk Premia (URP) and Unspanned Stochastic Volatility (USV).


Publication Date:
2018
Date Submitted:
Jul 01 2019
Pagination:
337-380
Citation:
Review of Finance
22
1
External Resources:




 Record created 2019-07-01, last modified 2019-07-02


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