Can Affine Models Match the Moments in Bond Yields?

This paper examines the ability of three-factor affine term structure models with essentially, extended, and semi-affine risk premium specifications to capture the dynamics of bond excess returns, yield volatility and higher order moments in yields. Extended affine models can best capture the time-variation in excess returns and yield volatility simultaneous. However, none of the three-factor models can fully match bond return predictability and yield volatility jointly. Extended affine models are more restricted in the ability to price bonds because of necessary parameter restrictions - the so-called Feller condition - and essentially affine and semi-affine models are therefore better suited for pricing purposes.