Pricing the term structure with linear regressions

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe show how to price the time series and cross section of zero coupon bonds via ordinary least squares regressions. Our approach allows computationally fast estimation of term structure models with a large number of pricing factors. Even though we do not impose cross-equation restrictions in the estimation, we show that our return regressions generate a term structure of interest rates with small pricing errors compared to commonly reported specifications, both in and out-of-sample.

Resolving the Spanning Puzzle in Macro-Finance Term Structure Models*

“…34 Pricing errors of estimated term structure models are often serially correlated, as documented for example by Adrian et al (2013) and Hamilton and Wu (2014). However, using serially-correlated errors in our simulations did not change our results.…”

Core and 'Crust': Consumer Prices and the Term Structure of Interest Rates

“…The observable variables are the inflation factors Π t and linear combinations of the nominal bond yields. Our preferred approach is to include the first four principal components extracted from the panel of yields (e.g., Adrian and Moench (2010), Duffee (2011b), Hamilton andWu (2011), Joslin, Singleton, andZhu (2011)). As a robustness check, we also estimate the model directly on the cross section of the yields.…”

“…Second, we explore model estimation on different data sets of yields (CRSP zero-coupon rates with maturity up to five years vs. constantmaturity Treasury yields with maturity up to 20 years) and inflation (CPI vs. personal consumption expenditures, or PCE, data). Third, we perform estimation directly on the yields, or on their principal components (as in, e.g., Adrian and Moench (2010), Hamilton andWu (2011), andZhu (2011)). Fourth, we explore estimation over different sample periods (a long sample going back to 1962Q1 vs. the post-1984 period).…”

Measuring monetary policy and its impact on the bond market of an emerging economy

“…One of the factors that renders this task complicated in emerging markets is the prevalence of several monetary policy instruments catering to multiple policy objectives (prominent examples being China, India and Latin America), 1 which makes it difficult to identify one single instrument as representative of policy stance. The objective of the present paper is to develop a method of overcoming this problem by using India as a case study.…”