Testing affine term structure models in case of transaction costs

We empirically analyze the impact of transaction costs on the performance of essentially affine interest rate models. We test the implied Euler restrictions and calculate the specification error bound of Hansen and Jagannathan to measure model misspecification. Using both short-maturity and long-mat...

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Published inJournal of econometrics Vol. 126; no. 1; pp. 201 - 232
Main Authors Driessen, Joost, Melenberg, Bertrand, Nijman, Theo
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.05.2005
Elsevier
Elsevier Sequoia S.A
SeriesJournal of Econometrics
Subjects
Applications
Costs
Econometrics
Economic models
Economic performance
Exact sciences and technology
Insurance, economics, finance
Interest rate models
Interest rates
Market frictions
Mathematics
Model misspecification
Model testing
Probability and statistics
Sciences and techniques of general use
Statistics
Studies
Term structure
Transaction costs
Transactional analysis
G12
Interest rate models
Market frictions
Model misspecification
E43
Transaction costs
Statistical test
Data analysis
Transaction cost
Factor model
Error estimation
Interest rate
Misspecification model
Statistical estimation
Market friction
Econometrics
Economic data
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Abstract We empirically analyze the impact of transaction costs on the performance of essentially affine interest rate models. We test the implied Euler restrictions and calculate the specification error bound of Hansen and Jagannathan to measure model misspecification. Using both short-maturity and long-maturity bond return data we find, under the assumption of frictionless markets, strong evidence of misspecification of affine yield models with up to three factors. Next, we incorporate transaction costs in our tests. The results show that the evidence of misspecification of essentially affine yield models disappears in case of monthly holding periods at market size transaction costs.
AbstractList We empirically analyze the impact of transaction costs on the performance of essentially affine interest rate models. We test the implied Euler restrictions and calculate the specification error bound of Hansen and Jagannathan to measure model misspecification. Using both short-maturity and long-maturity bond return data we find, under the assumption of frictionless markets, strong evidence of misspecification of affine yield models with up to three factors. Next, we incorporate transaction costs in our tests. The results show that the evidence of misspecification of essentially affine yield models disappears in case of monthly holding periods at market size transaction costs. [PUBLICATION ABSTRACT]
We empirically analyze the impact of transaction costs on the performance of essentially affine interest rate models. We test the implied Euler restrictions and calculate the specification error bound of Hansen and Jagannathan to measure model misspecification. Using both short-maturity and long-maturity bond return data we find, under the assumption of frictionless markets, strong evidence of misspecification of affine yield models with up to three factors. Next, we incorporate transaction costs in our tests. The results show that the evidence of misspecification of essentially affine yield models disappears in case of monthly holding periods at market size transaction costs.
Author Nijman, Theo
Melenberg, Bertrand
Driessen, Joost
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Issue 1
Keywords G12
Interest rate models
Market frictions
Model misspecification
E43
Transaction costs
Statistical test
Data analysis
Transaction cost
Factor model
Error estimation
Interest rate
Misspecification model
Statistical estimation
Market friction
Econometrics
Economic data
Language English
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Snippet We empirically analyze the impact of transaction costs on the performance of essentially affine interest rate models. We test the implied Euler restrictions...
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SubjectTerms Applications
Costs
Econometrics
Economic models
Economic performance
Exact sciences and technology
Insurance, economics, finance
Interest rate models
Interest rates
Market frictions
Mathematics
Model misspecification
Model testing
Probability and statistics
Sciences and techniques of general use
Statistics
Studies
Term structure
Transaction costs
Transactional analysis
Title Testing affine term structure models in case of transaction costs
URI https://dx.doi.org/10.1016/j.jeconom.2004.04.014
http://econpapers.repec.org/article/eeeeconom/v_3a126_3ay_3a2005_3ai_3a1_3ap_3a201-232.htm
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https://search.proquest.com/docview/38031460
Volume 126
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