We introduce a Nelson-Siegel type interest rate term structure model with the underlying yield factors following autoregressive processes revealing time-varying stochastic volatility. The factor volatilities capture risk inherent to the term struc- ture and are associated with the time-varying...

Standard theoretical model cannot generate positive and large real bond risk premium under power utility preferences. Following recent developments in equity premium literature we explore bond premium in a long run risk environment with generalized isoleastic preferences. This approach explains...