TY  - JOUR
AU  - Dai,Qiang
AU  - Singleton,Kenneth J.
TI  - Specification Analysis of Affine Term Structure Models
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6128
PY  - 1997
Y2  - August 1997
UR  - http://www.nber.org/papers/w6128
L1  - http://www.nber.org/papers/w6128.pdf
N1  - Author contact info:
Qiang Dai
Kenan-Flagler Business School
University of North Carolina
Campus Box #3490
McColl Building
Chapel Hill, NC 27599
Tel: 919/962-7182
E-Mail: qiang_dai@unc.edu

Kenneth J. Singleton
Graduate School of Business
Knight Management Center
Stanford University
Stanford, CA 94305
Tel: 650/723-5753
Fax: 650/725-6152
E-Mail: kenneths@stanford.edu
AB  - This paper characterizes, interprets, and tests the over-identifying restrictions imposed in affine models of the term" structure.  Letting r(t) = ë Y(t), where Y is an unobserved vector affine process, our analysis proceeds in three steps. First, we show that affine models can be categorized according to the different over-identifying restrictions they impose on (i) ë, and (ii) the parameters of the diffusion matrices.  Second, this formulation is shown to be equivalent to a model in which there is a terraced drift structure with one of the state variables being the stochastic long-run mean of r.  This equivalence allows direct comparisons of the substantive restrictions on the dynamics of interest rates imposed in CIR-style models and models in which the state variables are the stochastic long-run mean and volatility of r.  Third, we compute simulated method of moments estimates of a three-factor affine term structure model, and test the over-identifying restrictions on the joint distribution of long- and short-term interest rates implied by extant affine models of r.  We find allowing for correlated factors is key to simultaneously describing the short and long ends of the yield curve.  This finding is interpreted in terms of the properties of the risk factors underlying term structure movements.
ER  -