A portfolio-based evaluation of affine term structure models

We focus on affine term structure models as tools for active bond portfolio management. Our financial exercise comprises the following steps: 1) forecast the future values of the state variables implied by several multi-factor models; 2) approximate the conditional moments of the state vector to come up with discrete scenarios for the future state variables 3) compute bond returns for various maturities at future dates from the theoretical asset pricing relations 4) solve the portfolio problem faced by an investor with a six month horizon who takes into account the possibility to rebalance after one quarter. The sequence of optimal portfolios is evaluated in terms of financial properties. We show that a financial based evaluation of term structure models may yield results conflicting with those obtained from a statistical evaluation.