Estimating Time-Varying Factors’ Variance in the String Term Structure Model with Stochastic Volatility

This paper presents a new string term structured model with stochastic volatility calibrated with futures and options market data. I use interest rate options to build a time series of the variance of the factors that drive the interest rates (level, slope, and curvature). In addition, the variance of the factors is governed by a mean-reverting stochastic volatility process, whose model’s parameters are estimated within a new framework through the minimization of the distance between the moments of the gamma distribution