Time-Varying Volatility and the Dynamic Behavior of the Term Structure.

The article reexamines the work by researchers Robert Engle, Victor Ng, and Michael Rothschild in 1990 on the Factor ARCH model for Treasury bills using a larger data set. It aims to discover how changes in the return premia relate to changes in the liquidity preference of investors. The research provides insight into the nature of yield curves and the relationship between volatility levels the shape of the curves. The authors recommend further work on volatility-based premium adjustments and how they affect term structure of interest rates.