We propose no-arbitrage term structure models with volatility factors that follow GARCH processes. The models’ tractability is similar to canonical affine term structure models, but they fit yield volatility much better, especially for long-maturity yields. This improvement does not come at the expense of a deterioration in yield fit. Because of the improved volatility fit, the model performs substantially better in pricing Treasury futures options. We conclude that the specification of the volatility factors is critical. Modeling volatility as a function of (lagged) squared innovations to factors improves on models where volatility is a linear function of the factors.

中文翻译：

---

动态期限结构模型中的波动性建模


我们提出了遵循 GARCH 流程的具有波动性因子的无套利期限结构模型。该模型的易处理性与规范仿射期限结构模型类似，但它们更好地适应收益率波动性，特别是对于长期收益率。这种改进并不以产量拟合的恶化为代价。由于波动率拟合得到改善，该模型在国债期货期权定价方面表现明显更好。我们的结论是，波动率因素的规范至关重要。将波动率建模为因子（滞后）平方创新的函数，改进了波动率是因子的线性函数的模型。