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1999] “Testing Affine Term Structure Models in case of Transaction Costs

By Joost Driessen, Bertrand Melenberg, Theo Nijman, We Thank Lars Hansen, Pieter-jelle Van Der Sluis, Bas Werker and An Associate

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

Topics: JEL Codes, G12, E43
Publisher: University of Michigan Press
Year: 2011
OAI identifier: oai:CiteSeerX.psu:10.1.1.196.6641
Provided by: CiteSeerX
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