Skip to main content Accessibility help
×
Home

Term Structure Estimation with Survey Data on Interest Rate Forecasts

  • Don H. Kim (a1) and Athanasios Orphanides (a2)

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.

Copyright

References

Hide All
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), 745787.
Babbs, S. H., and Nowman, K. B.. “Kalman Filtering of Generalized Vasicek Term Structure Models.” Journal of Financial and Quantitative Analysis, 34 (1999), 115130.
Ball, C. A., and Torous, W. N.. “Unit Roots and Estimation of Interest Rate Dynamics.” Journal of Empirical Finance, 3 (1996), 215238.
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), 309348.
Campbell, J. Y. “Some Lessons from the Yield Curve.” Journal of Economic Perspectives, 9 (1995), 129152.
Campbell, J. Y., and Shiller, R. J.. “Yield Spreads and Interest Rate Movements: A Bird’s Eye View.” Review of Economic Studies, 58 (1991), 495514.
Chun, A. L. “Expectations, Bond Yields, and Monetary Policy.” Review of Financial Studies, 24 (2011), 208247.
Cogley, T., and Sargent, T. J.. “Evolving Post-World War II U.S. Inflation Dynamics.” In NBER Macroeconomics Annual, 16 (2001), 331373.
Croushore, D.Low Inflation: The Surprise of 1990s.” Federal Reserve Bank of Philadelphia Business Review, July/Aug. (1998), 312.
Dai, Q., and Singleton, K. J.. “Specification Analysis of Affine Term Structure Models.” Journal of Finance, 55 (2000), 19431978.
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), 415441.
de Jong, F.. “Time Series and Cross-Section Information in Affine Term-Structure Models.” Journal of Business Economics and Statistics, 18 (2000), 300314.
Duarte, J.Evaluating an Alternative Risk Preference in Affine Term Structure Models.” Review of Financial Studies, 17 (2004), 379404.
Duffee, G. R. “Idiosyncratic Variation of Treasury Bill Yields.” Journal of Finance, 51 (1996), 527551.
Duffee, G. R. “Term Premia and Interest Rate Forecasts in Affine Models.” Journal of Finance, 57 (2002), 405443.
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), 108142.
Friedman, B. M. “Survey Evidence on the ‘Rationality’ of Interest Rate Expectations.” Journal of Monetary Economics, 6 (1980), 453465.
Froot, K. A. “New Hope for the Expectations Hypothesis of the Term Structure of Interest Rates.” Journal of Finance, 44 (1989), 283305.
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), 201212.
Harvey, A. C. Forecasting, Structural Time Series Models and the Kalman Filter. Cambridge, UK: Cambridge University Press (1989).
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), 113146.
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), 608616.
Kohn, D. “Forward-Looking Rules for Monetary Policy: Comment.” In Monetary Policy Rules, Taylor, J. B., ed. Chicago, IL: University of Chicago Press (1999), 192199.
Kozicki, S., and Tinsley, P. A.. “Shifting Endpoints in the Term Structure of Interest Rates.” Journal of Monetary Economics, 47 (2001), 613652.
Merton, R. C. “On Estimating the Expected Return on the Market: An Exploratory Investigation.” Journal of Financial Economics, 8 (1980), 323361.
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703708.
Pennacchi, G. G. “Identifying the Dynamics of Real Interest Rates and Inflation: Evidence Using Survey Data.” Review of Financial Studies, 4 (1991), 5386.
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).
Svensson, L. E. O. “Estimating Forward Interest Rates with the Extended Nelson and Siegel Method.” Quarterly Review, Sveriges Riksbank (1995), 1326.
Thomas, L. B. Jr. “Survey Measures of Expected U.S. Inflation.” Journal of Economic Perspectives, 13 (1999), 125144.

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed