Dynamically Consistent Analysis of Realized Covariations in Term Structure Models

ArXiv ID: 2406.19412 “View on arXiv”

Authors: Unknown

Abstract

In this article we show how to analyze the covariation of bond prices nonparametrically and robustly, staying consistent with a general no-arbitrage setting. This is, in particular, motivated by the problem of identifying the number of statistically relevant factors in the bond market under minimal conditions. We apply this method in an empirical study which suggests that a high number of factors is needed to describe the term structure evolution and that the term structure of volatility varies over time.

Keywords: Term Structure of Interest Rates, No-Arbitrage Condition, Nonparametric Analysis, Yield Curve Factors, Volatility Modelling, Fixed Income

Complexity vs Empirical Score

• Math Complexity: 8.5/10
• Empirical Rigor: 7.0/10
• Quadrant: Holy Grail
• Why: The paper is mathematically dense with advanced functional analysis, infinite-dimensional processes, and semimartingale theory, scoring high on math complexity. It also includes a rigorous empirical study with real bond market data, specific estimators, and Monte-Carlo validation, justifying a strong empirical rigor score.

  flowchart TD
    A["Research Goal: Identify statistically relevant<br>yield curve factors under no-arbitrage"] --> B["Methodology: Nonparametric<br>Realized Covariation Analysis"]
    
    B --> C["Data: High-frequency<br>intraday bond prices"]
    
    C --> D{"Computational Process"}
    D --> E["Robust Covariation Estimation"]
    D --> F["No-Arbitrage Constraint Check"]
    
    E & F --> G["Key Findings"]
    
    G --> H["Multiple factors needed<br>for term structure evolution"]
    G --> I["Time-varying term structure<br>of volatility"]