Working Paper: Modeling Persistent Interest Rates with Volatility-Induced Stationarity

Working Paper - October 2019 - No. 142

Authors Hansen, Anne Lundgaard (Københavns Universitet)
Subject International Economy; Models
Type Working paper
Year 2019
Published 7 October 2019
We propose a new model for the term structure of interest rates, which embraces the extreme persistence observed in interest rate data. This is achieved by introducing so-called volatility-induced stationarity. We apply the model to U.S. Treasury bond yield data and show that volatility-induced stationarity improves estimation of term premia and forecasting of interest rates compared to existing models.