Abstract
This article develops a new family of Gaussian macro-dynamic 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" arbitrage-free 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 no-arbitrage restrictions on the joint distribution of bond yields and macro risks, comparing models with and without the restriction that macro risks are spanned by yield-curve information; and (ii) the identification of the policy parameters in Taylor-style monetary policy rules within MTSMs with macro risk factors and lags.
Original language | English (US) |
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Article number | nbt012 |
Pages (from-to) | 581-609 |
Number of pages | 29 |
Journal | Journal of Financial Econometrics |
Volume | 11 |
Issue number | 4 |
DOIs | |
State | Published - Sep 2013 |
All Science Journal Classification (ASJC) codes
- Finance
- Economics and Econometrics