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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 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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Bibliographic Info

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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