02721cam a22002777 4500001000700000003000500007005001700012008004100029100002900070245023100099260006600330490004200396500002000438520139600458530006101854538007201915538003601987690007402023690010102097700002602198700002502224710004202249830007702291856003802368856003702406w10756NBER20170525185239.0170525s2004 mau||||fs|||| 000 0 eng d1 aCollin-Dufresne, Pierre.10aCan Interest Rate Volatility be Extracted from the Cross Section of Bond Yields? An Investigation of Unspanned Stochastic Volatilityh[electronic resource] /cPierre Collin-Dufresne, Christopher S. Jones, Robert S. Goldstein. aCambridge, Mass.bNational Bureau of Economic Researchc2004.1 aNBER working paper seriesvno. w10756 aSeptember 2004.3 aMost affine models of the term structure with stochastic volatility (SV) predict that the variance of the short rate is simultaneously a linear combination of yields and the quadratic variation of the spot rate. However, we find empirically that the A1(3) SV model generates a time series for the variance state variable that is strongly negatively correlated with a GARCH estimate of the quadratic variation of the spot rate process. We then investigate affine models that exhibit "unspanned stochastic volatility (USV)." Of the models tested, only the A1(4) USV model is found to generate both realistic volatility estimates and a good cross-sectional fit. Our findings suggests that interest rate volatility cannot be extracted from the cross-section of bond prices. Separately, we propose an alternative to the canonical representation of affine models introduced by Dai and Singleton (2001). This representation has several advantages, including: (I) the state variables have simple physical interpretations such as level, slope and curvature, (ii) their dynamics remain affine and tractable, (iii) the model is econometrically identifiable, (iv) model-insensitive estimates of the state vector process implied from the term structure are readily available, and (v) it isolates those parameters which are not identifiable from bond prices alone if the model is specified to exhibit USV. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aG1 - General Financial Markets2Journal of Economic Literature class. 7aC4 - Econometric and Statistical Methods: Special Topics2Journal of Economic Literature class.1 aJones, Christopher S.1 aGoldstein, Robert S.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w10756.4 uhttp://www.nber.org/papers/w1075641uhttp://dx.doi.org/10.3386/w10756