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Abbritti, M. (Mirko); Gil-Alana, L.A. (Luis A.); Lovcha, Y. (Yuliya); Moreno, A. (Antonio) (2012)
Languages: English
Types: Article
Subjects: Fixed Income Securities, Fixed Income Securities, Yield Curve, Affine Term Structure, Fractional Integration, Term Premium, Yield Curve, Affine Term Structure, Term Premium, :Economía y Empresa [Materias Investigacion], Fractional Integration
jel: jel:G1, jel:E4, jel:C3
Stationary I(0) models employed in yield curve analysis typically imply an unrealistically low degree of volatility in long-run short-rate expectations due to fast mean reversion. In this paper we propose a novel multivariate affine term structure model with a two-fold source of persistence in the yield curve: Long-memory and short-memory. Our model, based on an I(d) specification, nests the I(0) and I(1) models as special cases and the I(0) model is decisively rejected by the data. Our model estimates imply both mean reversion in yields and quite volatile long-distance short-rate expectations, due to the higher persistence imparted by the long-memory component. Our implied term premium estimates differ from those of the I(0) model during some relevant periods by more than 4 percentage points and exhibit a realistic countercyclical pattern.

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