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Long-term Yields Implied by Stochastic Discount Factor Decompositions

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  • Almeida, Caio
  • Cordeiro, Fernando

Abstract

We use the framework developed by Christensen (2017) and Hansen and Scheinkman (2009) to study the long-term interest rates in the US and Brazil. We apply a nonparametric estimator to US and Brazilian data to identify how the yield of a long-term zero-coupon bond responds to the initial state of the economy. Using a flexible specification for the state process leads to an interesting non-linear response of the yield to changes in the initial state. As a by-product of our work, we assess the performance of Christensen's estimator using Monte Carlo simulations based on two widely adopted asset pricing models (rare disasters and habit formation).

Suggested Citation

  • Almeida, Caio & Cordeiro, Fernando, 2019. "Long-term Yields Implied by Stochastic Discount Factor Decompositions," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 39(1), July.
    • Handle: RePEc:sbe:breart:v:39:y:2019:i:1:a:76365
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