02660cam a22003257 4500001000700000003000500007005001700012006001900029007001500048008004100063100002400104245015400128260006600282300005700348490004200405500001600447520105800463530006001521538007201581538003601653588002501689690009901714690019601813690011202009700001902121710004202140830007702182856003802259856003702297w12962NBER20200814115130.0m o d cr cnu||||||||200814s2007 mau fo 000 0 eng d1 aAndersen, Torben G.10aDo Bonds Span Volatility Risk in the U.S. Treasury Market? A Specification test for Affine Term Structure Models /cTorben G. Andersen, Luca Benzoni. aCambridge, Mass.bNational Bureau of Economic Researchc2007. a1 online resource:billustrations (black and white);1 aNBER working paper seriesvno. w12962 aMarch 2007.3 aWe 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. aHardcopy version available to institutional subscribers aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web.0 aPrint version record 7aC14 - Semiparametric and Nonparametric Methods: General2Journal of Economic Literature class. 7aC32 - Time-Series Models • Dynamic Quantile Regressions • Dynamic Treatment Effect Models • Diffusion Processes • State Space Models2Journal of Economic Literature class. 7aG12 - Asset Pricing • Trading Volume • Bond Interest Rates2Journal of Economic Literature class.1 aBenzoni, Luca.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w12962.40uhttp://www.nber.org/papers/w1296240uhttp://dx.doi.org/10.3386/w12962