Estimating dynamic affine term structure models

Duffee and Stanton (2012) demonstrated some pointed problems in estimating affine term structure models when the price of risk is dynamic, that is, risk factor dependent. The risk neutral parameters are estimated with precision, while the price of risk parameters are not. For the Gaussian models they investigated, these problems are replicated and are shown to stem from a lack of curvature in the log-likelihood function. This geometric issue for identifying the maximum of an essentially horizontal log-likelihood has statistical meaning. The Fisher information for the price of risk parameters is multiple orders of magnitude smaller than that of the risk neutral parameters. Prompted by the recent results of Christoffersen et al. (2014) a remedy to the lack of curvature is attempted. An unscented Kalman filter is used to estimate models where the observations are portfolios of FRAs, Swaps and Zero Coupon Bond Options. While the unscented Kalman filter performs admirably in identifying the unobserved risk factor processes, there is little improvement in the Fisher information.

Grantor dc:publisher.institution

Division of Actuarial Science

Year dc:date.issued

2015

Author dc:creator

• Pitsillis, Zachry Steven

Advisors dc:contributor.advisor

• Ouwehand, Peter
• McWalter, Thomas

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/11427/15731

OAI identifier oai:identifier

oai:open.uct.ac.za:11427/15731