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Long and short memory in dynamic term structure models

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  • rp21_15

    Final published version, 1.39 MB, PDF document

I provide a unified theoretical framework for long memory term structure models and show that the recent state-space approach suffers from a parameter identification problem. I propose a different framework to estimate long memory models in a state-space setup, which addresses the shortcomings of the existing approach. The proposed framework allows asymmetrically treating the physical and risk-neutral dynamics, which simplifies estimation considerably and helps to conduct an extensive comparison with standard term structure models. Relying on a battery of tests, I find that standard term structure models perform just as well as the more complicated long memory models and produce plausible term premium estimates.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages46
Publication statusPublished - 20 Dec 2021
SeriesCREATES Research Paper

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