Identification of Maximal Affine Term Structure Models
- ISSN: 00221082
- DOI: 10.1111/j.1540-6261.2008.01331.x
Building on Duffie and Kan (1996), we propose a new representation of affine models in which the state vector comprises infinitesimal maturity yields and their quadratic covariations. Because these variables possess unambiguous economic interpretations, they generate a representation that is globally identifiable. Further, this representation has more identifiable parameters than the "maximal" model of Dai and Singleton (2000). We implement this new representation for select three-factor models and find that model-independent estimates for the state vector can be estimated directly from yield curve data, which present advantages for the estimation and interpretation of multifactor models.