An affine factor model is one in which multiple factors $X$ may be present. Which of the following is not true of an affine factor model.
A) The drift $\mu ( X )$ will be linear in $X$ .
B) The volatility $\sigma ( X )$ will be linear in $X$ .
C) The yield $R ( X )$ will be linear in $X$ .
D) The logarithm of the price scaled by maturity is the yield.

Question

An affine factor model is one in which multiple factors  $X$ may be present. Which of the following is not true of an affine factor model.
A) The drift $\mu ( X )$ will be linear in $X$ .
B) The volatility $\sigma ( X )$ will be linear in $X$ .
C) The yield $R ( X )$ will be linear in $X$ .
D) The logarithm of the price scaled by maturity is the yield.

Quizplus · Accepted Answer

The volatility $\sigma(X)$ in an affine factor model does not have to be linear in $X$; it can be a function of $X$ that is not necessarily linear, unlike the drift $\mu(X)$ and the yield $R(X)$, which are linear in $X$.

An Affine Factor Model Is One in Which Multiple Factors XXX

An Affine Factor Model Is One in Which Multiple Factors $X$