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Affine Term Structure Models

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Abstract

The term structure of interest rates refers to the relationship between the yields-to-maturity of a set of bonds and their times-to-maturity. It is a simple descriptive measure of the cross-section of bond prices observed at a point in time. An affine term structure model hypothesizes that the term structure of interest rates at any point in time is a time-invariant linear function of a small set of common state variables or factors. Once the dynamics of the state variables and their risk premiums are specified, the dynamics of the term structure are determined.

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© 2008 Palgrave Macmillan, a division of Macmillan Publishers Limited

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Brandt, M.W., Chapman, D.A. (2008). Affine Term Structure Models. In: Durlauf, S.N., Blume, L.E. (eds) The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-58802-2_13

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