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Term Structure Estimation with Survey Data on Interest Rate Forecasts

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Author Info
Kim, Don H.
Orphanides, Athanasios

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Abstract

The estimation of dynamic no-arbitrage term structure models with a flexible specification of the market price of risk is beset by a severe small-sample problem arising from the highly persistent nature of interest rates. We propose using survey forecasts of a short-term interest rate as an additional input to the estimation to overcome the problem. The three-factor pure-Gaussian model thus estimated with the U.S. Treasury term structure for the 1990-2003 period generates a stable estimate of the expected path of the short rate, reproduces the well-known stylized patterns in the expectations hypothesis tests, and captures some of the short-run variations in the survey forecast of the changes in longer-term interest rates.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5341.

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Date of creation: Nov 2005
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Handle: RePEc:cpr:ceprdp:5341

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Keywords: Dynamic term structure models expectations hypothesis interest rate forecasts survey data term premia

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Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jens H. E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, 2007. "The Affine Arbitrage-Free Class of Nelson-Siegel Term Structure Models," PIER Working Paper Archive 07-029, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
    Other versions:
  2. Jens H. E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, 2008. "An arbitrage-free generalized Nelson-Siegel term structure model," Working Paper Series 2008-07, Federal Reserve Bank of San Francisco. [Downloadable!]
  3. Sharon Kozicki & Peter Tinsley, 2005. "Term structure transmission of monetary policy," Research Working Paper RWP 05-06, Federal Reserve Bank of Kansas City. [Downloadable!]
    Other versions:
  4. Taboga, Marco, 2007. "Structural change and the bond yield conundrum," MPRA Paper 4965, University Library of Munich, Germany. [Downloadable!]
  5. Daniel L. Thornton, 2007. "The unusual behavior of the federal funds and 10-year Treasury rates: a conundrum or Goodhart’s Law?," Working Papers 2007-039, Federal Reserve Bank of St. Louis. [Downloadable!]
  6. David Backus & Jonathan H. Wright, 2007. "Cracking the conundrum," Finance and Economics Discussion Series 2007-46, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  7. Meredith Beechey, 2006. "A closer look at the sensitivity puzzle: the sensitivity of expected future short rates and term premia to macroeconomic news," Finance and Economics Discussion Series 2007-06, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  8. Don H Kim, 2007. "Spanned stochastic volatility in bond markets: a reexamination of the relative pricing between bonds and bond options," BIS Working Papers 239, Bank for International Settlements. [Downloadable!]
  9. J. Benson Durham, 2007. "Implied interest rate skew, term premiums, and the "conundrum"," Finance and Economics Discussion Series 2007-55, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  10. J. Benson Durham, 2006. "An estimate of the inflation risk premium using a three-factor affine term structure model," Finance and Economics Discussion Series 2006-42, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  11. Don Kim, 2008. "Challenges in macro-finance modeling," Finance and Economics Discussion Series 2008-06, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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