Discrete time affine term structure models with squared Gaussian shocks (DTATSM-SGS)

The tractability of discrete time affine term structure models (DTATSM) is fully preserved when adding squared Gaussian shocks (SGS) to factor processes. SGS guarantee non-negative factors under parameter restrictions that do not affect market prices risk. Feller conditions are needed. Changes measure can alter the conditional covariance and yields through flexible second-order Esscher transform. Non-negative be conditionally correlated real even if they risk-neutral measure. empirical evidence from US Treasury shows tend predict volatility, unconditional moments premia better than corresponding autoregressive gamma (AG) models.