Identification of Maximal Affine Term Structure Models





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      Collin-Dufresne is from the Haas School of Business, University of California at Berkeley, and NBER. Goldstein is from the Carlson School of Management, University of Minnesota, and NBER. Jones is from the Marshall School of Business, University of Southern California. We thank seminar participants at UCLA, Cornell University, McGill, the University of Minnesota, the University of Arizona, UNC, Syracuse University, the University of Pennsylvania, the USC Applied Math seminar, the University of Texas at Austin, the Federal Reserve Bank of San Francisco, the CIREQ-CIRANO-MITACS conference on Univariate and Multivariate Models for Asset Pricing, the Econometric Society Meetings in Washington DC, and the Math-finance workshop in Frankfurt for their comments and suggestions. We would like to thank Luca Benzoni, Michael Brandt, Mike Chernov, Qiang Dai, Jefferson Duarte, Greg Duffee, Garland Durham, Bing Han, Philipp Illeditsch, Mike Johannes, and Ken Singleton for many helpful comments. We are especially grateful to the editor, Suresh Sundaresan, and an anonymous referee for their extensive guidance.


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.