Term Structure Persistence
Authors
Mirko Abbritti
Luis A. Gil-Alaña
Yuliya Lovcha
Antonio Moreno
Type
Article
Publisher
Journal of Financial Econometrics, Vol. 14, Issue 2
Pages
331-352
Date
01-03-2016

Stationary I(0) models employed in yield curve analysis typically imply an unrealistically low degree of volatility in long-run, short-rate expectations due to fast mean reversion. In this article, we propose a novel multivariate affine term structure model with a two-fold source of persistence in the yield curve: long memory and short memory. Our model, based on an I(d) specification, nests the I(0) and I(1) models as special cases and the I(0) model is decisively rejected by the data. Our model estimates imply both mean reversion in yields and quite volatile long-distance, short-rate expectations, due to the higher persistence imparted by the long-memory component. Our implied term premium estimates differ from those of the I(0) model during some relevant periods by more than 3 percentage points and exhibit a realistic counter-cyclical pattern.

Article.