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Term Structure Estimation with Survey Data on Interest Rate Forecasts

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  • Kim, Don H.
  • Orphanides, Athanasios

Abstract

The estimation of dynamic term structure models with flexible specification of market price of risk is beset by a severe small-sample problem arising from the highly persistent nature of interest rates. We propose to use survey data on the forecast of short-term interest rates as an additional input in the estimation to overcome the problem. The 3-factor pure-Gaussian model, thus estimated with the US Treasuries term structure for the 1990-2004 period, generates a stable estimate of expected path of the short-term interest rate, reproduces the well-known stylized patterns in the expectations hypothesis tests, and captures a large part of the short-run variations in the survey forecast of changes in longer-term interest rates

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Bibliographic Info

Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 47 (2012)
Issue (Month): 01 (February)
Pages: 241-272

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Handle: RePEc:cup:jfinqa:v:47:y:2012:i:01:p:241-272_00

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