Unspanned stochastic volatility in the linear-rational square-root model: Evidence from the Treasury market
Year: 2024
Type: article
Abstract: This study examines the ability of the linear-rational square-root model to simultaneously capture cross-sectional and time-series dynamics of bond yields and their variances. The preferred model specification comprises five factors, two of which are not spanned by the yield curve, introducing unspanned stochastic volatility (USV). This specification provides a close in-sample fit to yields and yield variances, emphasizing the need for USV. Out-of-sample testing demonstrates low variance forecast errors. The specification provides evidence of USV in conditional yield variance and bond risk premia, linked to macroeconomic uncertainty.
Source: Journal of Banking & Finance
Author: Jorge Wolfgang Hansen
Institution: Aarhus University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $3,240
OpenAlex ID: W4405105980