Multifactor Affine Term Structure with Macroeconomic Factors

Abstract: We present a multifactor model of the affine term structure of interest rates with dynamics of macroeconomic factors following the diffusion process in the Vasicek model. Using observable series, we investigate the goodness of fit of the model and the impact of the variables on bond yields. We describe in detail the derivation of the model and the numerical techniques for estimating it. We find that the model achieves a stronger fitness for bonds of 3-month, 6-month and 1-year maturities during and post financial crisis and the inclusion of all selected macroeconomic variables enables a better-performing model.