Affine Models

TL;DR

This paper reviews affine term structure models in finance, highlighting their theoretical foundations, empirical applications, and practical methods for pricing and parameter estimation, emphasizing their analytical tractability and flexibility.

Contribution

It provides a comprehensive overview of affine models, connecting their theoretical basis with empirical techniques and practical applications in finance.

Findings

Affine models are analytically tractable and flexible.

Methods for securities pricing using affine models are discussed.

Parameter estimation techniques for affine models are presented.

Abstract

Affine term structure models have gained significant attention in the finance literature, mainly due to their analytical tractability and statistical flexibility. The aim of this article is to present both theoretical foundations as well as empirical aspects of the affine model class. Starting from the original one-factor short-rate models of Vasi\v{c}ek and Cox \emph{et al,} we provide an overview of the properties of regular affine processes and explain their relationship to affine term structure models. Methods for securities pricing and for parameter estimation are also discussed, demonstrating how the analytical tractability of affine models can be exploited for practical purposes.