October 12, 2018
11:00 a.m.
Louvain-la-Neuve
CORE, room b-135
Joint CORE-FIN seminar
The Structure of Risks in Equilibrium Affine Models of Bond Yields
Anh Le, Penn State
Equilibrium affine term structure models (ETSMs) typically imply that expected excess returns on bonds are determined entirely as an affine function of the conditional variances of the state process. We show that, knowing only this structure of risk premiums, maximum likelihood estimates of these variances can be extracted from the term structure of bond yields. Consistent with ETSMs, the information in US Treasury yields about bond excess returns is spanned by our fitted time-varying volatilities. However, contrary to the structure of ETSMs, there is substantial variation in risk premiums that is unspanned by bond yields owing to a time-varying market price of inflation risk and liquidity or flight-to-quality risks in the Treasury market.
(joint with K. Singleton)