This paper develops and estimates a dynamic arbitrage-free model for the current forward curve as the sum of (i) an unconditional component, (ii) a maturity-specifc component and (iii) a date-specifc component.

A companion paper (Nelson (1992)) showed that in data observed at high frequencies, an ARCH model may do a good job at estimating conditional variances, even when the ARCH model is severely misspecified. While such models may perform reasonably well at filtering (i.e., at estimating unobserved...