Quadratic term structure models in discrete time

Quadratic Term Structure Models: Analysis and Performance

“…This property remains as long as the factors transition density remains Gaussian. Furthermore, as noted by Realdon (2006), when the discrete time steps converge to zero, a discrete time model converges to a continuous one. Then, the class of the models in continuous time may be seen as a particular case of the discrete one.…”

“…It has been theoretically presented by Realdon (2006) and is derived from the continuous QTSM of Dai-Le-Singleton (2005). Regarding the continuous time, the discrete time allows more flexibility in the specification of the market price of risk as mention by Dai-Le-Singleton (2005).…”

A Shadow Rate or a Quadratic Policy Rule? The Best Way to Enforce the Zero Lower Bound in the United States

“…Another possibility is to let the short rate be a restricted quadratic function of pricing factors, which leads to the quadratic term structure model (QTSM) studied by Ahn, Dittmar, and Gallant (2002), Leippold and Wu (2002), and Realdon (2006) among others.…”

“…0 t e C j x t , where the recursive formulae for e A j , e B j , and e C j are derived in Realdon (2006). The existence of closed-form bond prices means that the QTSM is computationally more tractable than the SRM, e.g.…”

“…Together with the restrictions given in Section II.A.1, identi…cation is achieved when x = 0 and xx is symmetric with diagonal elements equal to 1 (see Ahn et al (2002) and Realdon (2006)). The ZLB may then be enforced by imposing the additional restrictions that 0 = 0 and xx is positive semi-de…nite.…”