Hostname: page-component-586b7cd67f-r5fsc Total loading time: 0 Render date: 2024-12-02T23:23:50.221Z Has data issue: false hasContentIssue false
  • English
  • Français

Term Structure Estimation with Survey Data on Interest Rate Forecasts

Published online by Cambridge University Press:  16 December 2011

Don H. Kim  and
Athanasios Orphanides
Don H. Kim
Affiliation:
School of Business, Yonsei University, 262 Seongsanno, Seodaemun-gu, Seoul 120-749, Korea, [email protected]
Athanasios Orphanides
Affiliation:
Central Bank of Cyprus, 80 Kennedy Ave., Nicosia 1076, Cyprus. [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

The estimation of dynamic no-arbitrage term structure models with a flexible specification of the market price of risk is beset by severe small-sample problems arising from the highly persistent nature of interest rates. We propose using survey forecasts of a short-term interest rate as an additional input to the estimation to overcome the problem. To illustrate the methodology, we estimate the 3-factor affine-Gaussian model with U.S. Treasury yields data and demonstrate that incorporating information from survey forecasts mitigates the small-sample problem. The model thus estimated for the 1990–2003 sample generates a stable and sensible estimate of the expected path of the short rate, reproduces the well-known stylized patterns in the expectations hypothesis tests, and captures some of the short-run variations in the survey forecast of the changes in longer-term interest rates.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 1 , February 2012 , pp. 241 - 272
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ang, A., and Piazzesi, M.. “A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables.” Journal of Monetary Economics, 50 (2003), 745–787.CrossRefGoogle Scholar
Babbs, S. H., and Nowman, K. B.. “Kalman Filtering of Generalized Vasicek Term Structure Models.” Journal of Financial and Quantitative Analysis, 34 (1999), 115–130.CrossRefGoogle Scholar
Ball, C. A., and Torous, W. N.. “Unit Roots and Estimation of Interest Rate Dynamics.” Journal of Empirical Finance, 3 (1996), 215–238.CrossRefGoogle Scholar
Bekaert, G.; Hodrick, R. J.; and Marshall, D. A.. “On Biases in Tests of Expectations Hypothesis of the Term Structure of Interest Rates.” Journal of Financial Economics, 44 (1997), 309–348.CrossRefGoogle Scholar
Campbell, J. Y. “Some Lessons from the Yield Curve.” Journal of Economic Perspectives, 9 (1995), 129–152.CrossRefGoogle Scholar
Campbell, J. Y., and Shiller, R. J.. “Yield Spreads and Interest Rate Movements: A Bird’s Eye View.” Review of Economic Studies, 58 (1991), 495–514.CrossRefGoogle Scholar
Chun, A. L. “Expectations, Bond Yields, and Monetary Policy.” Review of Financial Studies, 24 (2011), 208–247.CrossRefGoogle Scholar
Cogley, T., and Sargent, T. J.. “Evolving Post-World War II U.S. Inflation Dynamics.” In NBER Macroeconomics Annual, 16 (2001), 331–373.CrossRefGoogle Scholar
Croushore, D. “Low Inflation: The Surprise of 1990s.” Federal Reserve Bank of Philadelphia Business Review, July/Aug. (1998), 3–12.Google Scholar
Dai, Q., and Singleton, K. J.. “Specification Analysis of Affine Term Structure Models.” Journal of Finance, 55 (2000), 1943–1978.CrossRefGoogle Scholar
Dai, Q., and Singleton, K. J.. “Expectation Puzzles, Time-Varying Risk Premia, and Affine Models of the Term Structure.” Journal of Financial Economics, 63 (2002), 415–441.CrossRefGoogle Scholar
de Jong, F.. “Time Series and Cross-Section Information in Affine Term-Structure Models.” Journal of Business Economics and Statistics, 18 (2000), 300–314.CrossRefGoogle Scholar
Duarte, J. “Evaluating an Alternative Risk Preference in Affine Term Structure Models.” Review of Financial Studies, 17 (2004), 379–404.CrossRefGoogle Scholar
Duffee, G. R. “Idiosyncratic Variation of Treasury Bill Yields.” Journal of Finance, 51 (1996), 527–551.CrossRefGoogle Scholar
Duffee, G. R. “Term Premia and Interest Rate Forecasts in Affine Models.” Journal of Finance, 57 (2002), 405–443.CrossRefGoogle Scholar
Duffee, G. R., and Stanton, R. H.. “Evidence on Simulation Inference for Near Unit-Root Processes with Implications for Term Structure Estimation.” Journal of Financial Econometrics, 6 (2008), 108–142.CrossRefGoogle Scholar
Friedman, B. M. “Survey Evidence on the ‘Rationality’ of Interest Rate Expectations.” Journal of Monetary Economics, 6 (1980), 453–465.CrossRefGoogle Scholar
Froot, K. A. “New Hope for the Expectations Hypothesis of the Term Structure of Interest Rates.” Journal of Finance, 44 (1989), 283–305.CrossRefGoogle Scholar
Gurkaynak, R. S.; Sack, B. P.; and Swanson, E. T.. “Market-Based Measures of Monetary Policy Expectations.” Journal of Business and Economic Statistics, 25 (2007), 201–212.CrossRefGoogle Scholar
Harvey, A. C. Forecasting, Structural Time Series Models and the Kalman Filter. Cambridge, UK: Cambridge University Press (1989).Google Scholar
Jagannathan, R.; Kaplin, A.; and Sun, S.. “An Evaluation of Multi-Factor CIR Models Using LIBOR, Swap Rates, Cap and Swaption Prices.” Journal of Econometrics, 116 (2003), 113–146.CrossRefGoogle Scholar
Kim, C.-J., and Nelson, C. R.. “Has the U.S. Economy Become More Stable? A Bayesian Approach Based on a Markov-Switching Model of the Business Cycle.” Review of Economics and Statistics, 81 (1999), 608–616.CrossRefGoogle Scholar
Kohn, D. “Forward-Looking Rules for Monetary Policy: Comment.” In Monetary Policy Rules, Taylor, J. B., ed. Chicago, IL: University of Chicago Press (1999), 192–199.Google Scholar
Kozicki, S., and Tinsley, P. A.. “Shifting Endpoints in the Term Structure of Interest Rates.” Journal of Monetary Economics, 47 (2001), 613–652.CrossRefGoogle Scholar
Merton, R. C. “On Estimating the Expected Return on the Market: An Exploratory Investigation.” Journal of Financial Economics, 8 (1980), 323–361.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Pennacchi, G. G. “Identifying the Dynamics of Real Interest Rates and Inflation: Evidence Using Survey Data.” Review of Financial Studies, 4 (1991), 53–86.CrossRefGoogle Scholar
Rudebusch, G., and Wu, T.. “The Recent Shift in Term Structure Behavior from a No-Arbitrage Macro-Finance Perspective.” Federal Reserve Bank of San Francisco Working Paper No. 2004-25 (2004).CrossRefGoogle Scholar
Svensson, L. E. O. “Estimating Forward Interest Rates with the Extended Nelson and Siegel Method.” Quarterly Review, Sveriges Riksbank (1995), 13–26.Google Scholar
Thomas, L. B. Jr. “Survey Measures of Expected U.S. Inflation.” Journal of Economic Perspectives, 13 (1999), 125–144.CrossRefGoogle Scholar