TY  - JOUR
AU  - Boudoukh,Jacob
AU  - Richardson,Matthew
TI  - A Multifactor, Nonlinear, Continuous-Time Model of Interest Rate Volatility
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7213
PY  - 1999
Y2  - July 1999
UR  - http://www.nber.org/papers/w7213
L1  - http://www.nber.org/papers/w7213.pdf
N1  - Author contact info:
Jacob Boudoukh
The Caesarea Center
Arison School of Business, IDC
3 Kanfei Nesharim St
Herzlia 46150
ISRAEL
Tel: 972/544-875727
E-Mail: jboudouk@idc.ac.il

Matthew P. Richardson
Stern School of Business
New York University
44 West 4th Street, Suite 9-190
New York, NY 10012
Tel: 212/998-0349
Fax: 212/995-4233
E-Mail: mrichar0@stern.nyu.edu
AB  - This paper presents a general, nonlinear version of existing multifactor models, such as Longstaff and Schwartz (1992). The novel aspect of our approach is that rather than choosing the model parameterization out of  thin air,' our processes are generated from the data using approximation methods for multifactor continuous-time Markov processes. In applying this technique to the short- and long-end of the term structure for a general two-factor diffusion process for interest rates, a major finding is that the volatility of interest rates is increasing in the level of interest rates only for sharply upward sloping term structures. In fact, the slope of the term structure plays a larger role in determining the magnitude of the diffusion coefficient. As an application, we analyze the model's implications for the term structure of term premiums.
ER  -