stochastic volatility, and (iii) the specification of the volatility process itself. We then consider a variety of model … movement and whether stochastic volatility comes from jump or diffusion. We find that, to capture the behavior of the S&P 500 …

-factor settings with latent variables that are readily interpreted as the conditional mean and volatility of the interest rate, and … perform illustrative calibrations for the yield curve. We select a three-factor specification featuring stochastic volatility ….S. short rate dynamics. The inclusion of the stochastic volatility factor is critical, whereas the stochastic mean offers a …

and curvature in the yield curve. We model the volatility dynamics in these yield factors using both GARCH and level … effects and find that both are needed to adequately model yield-factor volatility. The level effect is routinely used when … modeling volatility in short-term interest rates and we find that the level of the short-rate is useful in modeling the …