## Friday, April 25, 2014

### Yield Curve Modeling Update

An earlier post, DNS/AFNS Yield Curve Modeling FAQs, ended with:

"What next? Job 1 is flexible incorporation of stochastic volatility, moving from $$A_0(N)$$ to $$A_x(N)$$ for $$x>0$$, as bond yields are most definitely conditionally heteroskedastic. Doing so is important for everything from estimating time-varying risk premia to forming correctly-calibrated interval and density forecasts. Work along those lines is starting to appear. Christensen-Lopez-Rudebusch (2010), Creal-Wu (2013) and Mauabbi (2013) are good recent examples."

Good news. Creal-Wu (2013) is now Creal-Wu (2014), revised and extended to allow both spanned and unspanned stochastic volatility. Really nice stuff.