Macroeconomic Sources of Risk in the Term Structure
AbstractWe develop a new way of modeling time variation in term premia, based on the stochastic discount factor model of asset pricing. The joint distribution of excess U.S. bond returns of different maturity and the observable fundamental macroeconomic factors is modeled using multivariate GARCH with conditional covariances in the mean to capture the term premia. By testing the assumption of no arbitrage we derive a specification test of our model. We estimate the contribution made to the term premia at different maturities through real and nominal sources of risk. From the estimated term premia we recover the term structure of interest rates and examine how it varies through time. Finally, we examine whether the reported failures of the rational expectations hypothesis can be attributed to an omitted time-varying term premium. Copyright 2007 The Ohio State University.
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Bibliographic InfoArticle provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.
Volume (Year): 39 (2007)
Issue (Month): 1 (02)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879
Other versions of this item:
- Chiona Balfoussia & Michael Wickens, 2004. "Macroeconomic Sources of Risk in the Term Structure," CESifo Working Paper Series 1329, CESifo Group Munich.
- Michael R. Wickens & Chiona Balfoussia, 2004. "Macroeconomic Sources of Risk in the Term Structure," CEIS Research Paper 61, Tor Vergata University, CEIS.
- C5 - Mathematical and Quantitative Methods - - Econometric Modeling
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- G1 - Financial Economics - - General Financial Markets
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