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17
Inflation Expectations and Risk Premiums in an ArbitrageFree Model of Nominal and Real Bond Yields
, 2010
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Why Gaussian MacroFinance Term Structure Models are (Nearly) Unconstrained FactorVARs.” Discussion paper,
, 2011
"... ABSTRACT This article develops a new family of Gaussian macrodynamic term structure models (MTSMs) in which bond yields follow a lowdimensional factor structure and the historical distribution of bond yields and macroeconomic variables is characterized by a vectorautoregression with order p > 1 ..."
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Cited by 21 (7 self)
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ABSTRACT This article develops a new family of Gaussian macrodynamic term structure models (MTSMs) in which bond yields follow a lowdimensional factor structure and the historical distribution of bond yields and macroeconomic variables is characterized by a vectorautoregression with order p > 1. Most formulations of MTSMs with p > 1 are shown to imply a much higher dimensional factor structure for yields than what is called for by historical data. In contrast, our "asymmetric" arbitragefree MTSM gives modelers the flexibility to match historical lag distributions with p > 1 while maintaining a parsimonious factor representation of yields. Using our canonical family of MTSMs we revisit: (i) the impact of noarbitrage restrictions on the joint distribution of bond yields and macro risks, comparing models with and without the restriction that macro risks are spanned by yieldcurve information; and (ii) the identification of the policy parameters in Taylorstyle monetary policy rules within MTSMs with macro risk factors and lags. ( JEL: G12,E43, C58, E58) KEYWORDS: Macrofinance term structure model, Lags, Taylor Rule Identification Dynamic term structure models in which a subset of the pricing factors are macroeconomic variables (MTSMs) often have bond yields depending on lags of these factors. 1 As typically parameterized, such MTSMs imply that the crosssection
Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset *
, 2008
"... This paper provides crosscountry empirical evidence on bond risk premia. I construct a panel of zerocoupon nominal government bond yields spanning ten industrialized countries and nearly two decades. I hence compute forward rates and then use two different methods to decompose these forward rates ..."
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Cited by 18 (1 self)
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This paper provides crosscountry empirical evidence on bond risk premia. I construct a panel of zerocoupon nominal government bond yields spanning ten industrialized countries and nearly two decades. I hence compute forward rates and then use two different methods to decompose these forward rates into expected future shortterm interest rates and term premiums. The first method uses an affine term structure model with macroeconomic variables as unspanned risk factors; the second method uses surveys. I find that term premium estimates declined across countries over the sample period, especially in countries that appear to have reduced inflation uncertainty by making substantial changes in the monetary policy frameworks of their central banks. During the recent financial crisis, term premiums have remained flat and even declined further in some countries, perhaps reflecting the effects of quantitative easing actions by many central banks.
Multifrequency Cascade Interest Rate Dynamics and DimensionInvariant Term Structures
"... We develop a class of dynamic term structure models that accommodates arbitrarily many interestrate factors with very few parameters. The model builds on a cascade interestrate dynamics that naturally ranks the factors by their rates of mean reversion, with each revolving around the next lowerfre ..."
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Cited by 3 (1 self)
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We develop a class of dynamic term structure models that accommodates arbitrarily many interestrate factors with very few parameters. The model builds on a cascade interestrate dynamics that naturally ranks the factors by their rates of mean reversion, with each revolving around the next lowerfrequency factor. The model further achieves dimension invariance by parameterizing the distributions of coefficients of the different frequency components. The net result is a class of term structure models with merely five parameters regardless of the number of factors. Using a panel of 15 LIBOR and swap rates, we estimate 15 models with one to 15 factors. The extensive estimation exercise shows that the 15factor model significantly outperforms the other lowerdimensional specifications. The highdimensional specification generates root mean squared pricing errors less than one basis point, thus making it an ideal candidate as a basis for forward rate curve stripping. The model also overcomes several known limitations of lowdimensional specifications by matching the observed low crosscorrelations between changes in different interest rate series and by
DimensionInvariant Dynamic Term Structures
, 2010
"... We develop a class of dynamic term structure models that accommodates arbitrarily many interestrate factors with very few parameters. The model builds on a shortrate cascade, a parsimonious recursive structure that naturally ranks the latent state variables by their rates of mean reversion, each r ..."
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Cited by 2 (0 self)
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We develop a class of dynamic term structure models that accommodates arbitrarily many interestrate factors with very few parameters. The model builds on a shortrate cascade, a parsimonious recursive structure that naturally ranks the latent state variables by their rates of mean reversion, each revolving around the next lowestfrequency factor. With appropriate assumptions on volatilities and risk premia, the model overcomes the curse of dimensionality associated with general affine models. Using a panel of 15 LIBOR and swap rates, we estimate models using from one to 15 factors and only five parameters. The insample fit of highdimensional specifications is near exact, with absolute pricing errors averaging less than one basis point, permitting yieldcurve stripping in an arbitragefree, dynamically consistent environment. Crossmaturity correlations accurately reflect empirical evidence, and outofsample interest
A theoretical foundation for the Nelson and Siegel class of yield curve models
, 2011
"... Yield curve models within the Nelson and Siegel (1987, hereafter NS) class have proven very popular in …nance and macro…nance, but they lack a theoretical foundation. In this article, I show how the Level, Slope, and Curvature components common to all NS models arise explicitly from loworder Taylor ..."
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Yield curve models within the Nelson and Siegel (1987, hereafter NS) class have proven very popular in …nance and macro…nance, but they lack a theoretical foundation. In this article, I show how the Level, Slope, and Curvature components common to all NS models arise explicitly from loworder Taylor expansions around central measures of the eigenvalues for the generic Gaussian a ¢ ne term structure model outlined in Dai and Singleton (2002). That theoretical foundation provides an assurance that NS models correspond to a wellaccepted framework for yield curve modeling. It further suggests that any yield curve from the GATSM class can be represented parsimoniously by a twofactor arbitragefree NS model. I derive such a model and apply it to investigating changes in United States yield curve dynamics over the period from 1971 to 2010. The results provide evidence for material changes in the datagenerating process for the yield curve between the periods 19711987, 19882002, and 20032010.
"Oil shocks and the Macroeconomy: Econometric estimation, economic modeling and policy implications",
, 2011
"... yield curve and the macroeconomy across time and frequencies ..."