Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/227860 
Year of Publication: 
2019
Series/Report no.: 
Danmarks Nationalbank Working Papers No. 142
Publisher: 
Danmarks Nationalbank, Copenhagen
Abstract: 
It is well-known that interest rates are extremely persistent, yet they are best modeled and understood as stationary processes. These properties are contradictory in the workhorse Gaussian affine term structure model in which persistent data often result in unit roots that imply non-stationarity. We resolve this puzzle by proposing a term structure model with volatilityinduced stationarity. Our model employs a leveldependent conditional volatility that maintains stationarity despite the presence of unit roots in the characteristic polynomial corresponding to the conditional mean. The model is consistent with key characteristics of U.S. Treasury data and obtains term premia that are economically plausible and consistent with survey data. Compared to the Gaussian affine term structure model, we improve out-of-sample forecasting of the yield curve.
Subjects: 
Yield curve
unit root
persistence problem
volatility-induced stationarity
macro-finance term structure model
level-dependent conditional volatility
JEL: 
E43
E44
G12
Document Type: 
Working Paper

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