TY  - JOUR
AU  - Andersen,Torben G.
AU  - Benzoni,Luca
TI  - Do Bonds Span Volatility Risk in the U.S. Treasury Market? A Specification test for Affine Term Structure Models
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12962
PY  - 2007
Y2  - March 2007
UR  - http://www.nber.org/papers/w12962
L1  - http://www.nber.org/papers/w12962.pdf
N1  - Author contact info:
Torben G. Andersen
Kellogg School of Management
Northwestern University
2001 Sheridan Road
Evanston, IL  60208
Tel: 847/467-1285
Fax: 847/491-5719
E-Mail: t-andersen@kellogg.northwestern.edu

Luca Benzoni
Research Department
Federal Reserve Bank of Chicago
230 S. LaSalle Street
Chicago, IL  60604-1413
Tel: 312-322-8499
E-Mail: lbenzoni@frbchi.org
AB  - We investigate whether bonds span the volatility risk in the U.S. Treasury market, as predicted by most 'affine' term structure models. To this end, we construct powerful and model-free empirical measures of the quadratic yield variation for a cross-section of fixed-maturity zero-coupon bonds ("realized yield volatility") through the use of high-frequency data. We find that the yield curve fails to span yield volatility, as the systematic volatility factors are largely unrelated to the cross-section of yields. We conclude that a broad class of affine diffusive, Gaussian-quadratic and affine jump-diffusive models is incapable of accommodating the observed yield volatility dynamics. An important implication is that the bond markets per se are incomplete and yield volatility risk cannot be hedged by taking positions solely in the Treasury bond market. We also advocate using the empirical realized yield volatility measures more broadly as a basis for specification testing and (parametric) model selection within the term structure literature.
ER  -