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Efficient bond price approximations in non-linear equilibrium-based term structure models

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  • Andreasen Martin M.
  • Zabczyk Pawel

    (CCBS, Bank of England and Centre for Macroeconomics, Bank of England, Threadneedle Street, London, EC2R 8AH, UK)

Abstract

This paper develops an efficient method to compute higher-order perturbation approximations of bond prices. At third order, our approach can significantly shorten the approximation process and its precision exceeds the log-normal method and a procedure using consol bonds. The efficiency gains greatly facilitate any estimation which is illustrated by considering a long-run risk model for the US. Allowing for an unconstrained intertemporal elasticity of substitution enhances the model’s fit, and we see further improvements when incorporating stochastic volatility and external habits.

Suggested Citation

  • Andreasen Martin M. & Zabczyk Pawel, 2015. "Efficient bond price approximations in non-linear equilibrium-based term structure models," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 19(1), pages 1-33, February.
    • Handle: RePEc:bpj:sndecm:v:19:y:2015:i:1:p:1-33:n:1
    DOI: 10.1515/snde-2012-0005
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    4. Martin M. Andreasen & Anders Kronborg, 2017. "The Extended Perturbation Method: New Insights on the New Keynesian Model," CREATES Research Papers 2017-14, Department of Economics and Business Economics, Aarhus University.

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