Modelling risk premium of repo interest rate in the SSE

With weekly data of repo rates in the SSE, it is found that the expectations hypothesis fails to explain the repo rates, and risk premiums are significant and time-varying. One-factor and two-factor Guassian essential affine models are estimated to model the time-varying risk premiums, and the likelihood ratio test shows that the two-factor model has no significant improvement over the one-factor model. Although one-factor Guassian essential affine model fits the risk premiums very well, the model doesn´t fit the means and standard deviations of the repo rates.