An affine three-factor model of the German term structure of interest rates with macroeconomic content
AbstractThis paper extends the empirical no-arbitrage Gaussian affine term structure model of Cassola and Luis (2003) in a way that leads to a Taylor rule expression for the short rate dynamics. The empirical results indicate that the dynamics of the German term structure of interest rates can be sufficiently explained by expected variations in inflation and output plus an additional unobservable factor. The novelty is that we are able to extract a monetary policy reaction function within this no-arbitrage model that closely resembles empirical reaction functions based on the dynamics of the short rate only.
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Bibliographic InfoArticle provided by Taylor and Francis Journals in its journal Applied Financial Economics Letters.
Volume (Year): 1 (2005)
Issue (Month): 3 (May)
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Web page: http://www.tandfonline.com/RAFL20
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- Nuno Cassola & Jorge Barros Luis, 2003. "A two-factor model of the German term structure of interest rates," Applied Financial Economics, Taylor & Francis Journals, vol. 13(11), pages 783-806.
- Peter Vlaar, 2007. "Term Structure Modeling for Pension Funds:What to do in Practice?," DNB Working Papers 123, Netherlands Central Bank, Research Department.
- Peter Spreij & Enno Veerman & Peter Vlaar, 2008.
"Multivariate Feller conditions in term structure models: Why do(n't) we care?,"
DNB Working Papers
173, Netherlands Central Bank, Research Department.
- Peter Spreij & Enno Veerman & Peter Vlaar, 2008. "Multivariate Feller conditions in term structure models: Why do(n't) we care?," Papers 0804.1039, arXiv.org.
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