Yield curve shapes and the asymptotic short rate distribution in affine one-factor models (Q928499)

The authors consider, under very general conditions, a characterization of the yield curve shapes that are attainable in term structure models where the risk-neutral short rate is given by a time-homogeneous one-dimensional conservative affine process in the sense of \textit{D. Duffie}, \textit{D. Filipović} and \textit{W. Schachermayer} [Ann. Appl. Probab. 13, No. 3, 984--1053 (2003; Zbl 1048.60059)]. It is shown that in such a model yield curves can only be normal, inverse or humped (i.e. endowed with a single local maximum), even though the parameter space is infinite-dimensional. An affine short rate process of this type leads to an exponentially affine structure of zero-coupon bond prices and thus also to an affine term structure of yields and forward rates. A criticism of (time-homogeneous) Cox-Ingersoll-Ross and Vasiček models is substantiated by their non-flexible properties. For example, they can not accommodate curves with a dip (local minimum), dip and a hump. The conditions are provided under which an affine process converges to a limit distribution. The limit distribution is characterized in terms of its cumulant generating functions. The paper is concluded by applying the theoretical results to several interest rate models, for example, Ornstein-Uhlenbeck-type model and some others.