A macro-finance term structure model with multivariate stochastic volatility

Abstract

This article examines some consequences of the presence of non-affine structures of multivariate stochastic volatility in a dynamic Nelson–Siegel model with macroeconomic variables. The results indicate that this non-affine model achieves superior in-sample fit for the observed yields, captures persistence patterns more consistent with stylized facts and empirical measures and also has greater explanatory power for the conditional volatility observed in yields compared to affine models and models without macroeconomic variables.