Long run risks in the term structure of interest rates: estimation
AbstractThis paper specifies and estimates a long run risks model with inflation by using the nominal term structure data in the United States from 1953 to 2006. The negative correlation between expected inflation and expected consumption growth in conjunction with the Epstein-Zin (1989) recursive preferences generates an upward sloping yield curve and fits the yield curve data better than the alternative specifications. However, the variations of the forward looking components of consumption growth and inflation in the estimated model are much smaller than implied by calibrated parameter values in the previous literature. An extended model with time varying volatilities alleviates this problem. In the extended model, estimated long run risks and volatilities, especially for inflation, are in line with survey data and the estimated inflation volatility explains a significant portion of the time variation of term premium.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 08-11.
Date of creation: 2008
Date of revision:
Other versions of this item:
- Taeyoung Doh, 2013. "Long‐Run Risks In The Term Structure Of Interest Rates: Estimation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(3), pages 478-497, 04.
- Taeyoung Doh, 2008. "Long Run Risks in the Term Structure of Interest Rates : Estimation," 2008 Meeting Papers 137, Society for Economic Dynamics.
- NEP-ALL-2009-01-10 (All new papers)
- NEP-CBA-2009-01-10 (Central Banking)
- NEP-MAC-2009-01-10 (Macroeconomics)
- NEP-MON-2009-01-10 (Monetary Economics)
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.:
- Alejandro Justiniano & Giorgio E. Primiceri, 2008.
"The Time-Varying Volatility of Macroeconomic Fluctuations,"
American Economic Review,
American Economic Association, vol. 98(3), pages 604-41, June.
- Alejandro Justiniano & Giorgio E. Primiceri, 2006. "The Time Varying Volatility of Macroeconomic Fluctuations," NBER Working Papers 12022, National Bureau of Economic Research, Inc.
- Giorgio Primiceri & Alejandro Justiniano, 2006. "The Time Varying Volatility of Macroeconomic Fluctuations," 2006 Meeting Papers 353, Society for Economic Dynamics.
- Jesús Fernández-Villaverde & Juan F. Rubio-Ramirez, 2006.
"Estimating Macroeconomic Models: A Likelihood Approach,"
122247000000000849, UCLA Department of Economics.
- Jes�s Fern�ndez-Villaverde & Juan F. Rubio-Ram�rez, 2007. "Estimating Macroeconomic Models: A Likelihood Approach," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1059-1087.
- Jesus Fernandez-Villaverde & Juan F. Rubio-Ramirez, 2006. "Estimating Macroeconomic Models: A Likelihood Approach," NBER Technical Working Papers 0321, National Bureau of Economic Research, Inc.
- Fernández-Villaverde, Jesús & Rubio-Ramirez, Juan Francisco, 2006. "Estimating Macroeconomic Models: A Likelihood Approach," CEPR Discussion Papers 5513, C.E.P.R. Discussion Papers.
- Monika Piazzesi & Martin Schneider, 2009. "Trend and cycle in bond premia," Staff Report 424, Federal Reserve Bank of Minneapolis.
- Luca Benati, 2008.
"The "Great Moderation" in the United Kingdom,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 40(1), pages 121-147, 02.
- Ravi Bansal & Amir Yaron, 2000.
"Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles,"
NBER Working Papers
8059, National Bureau of Economic Research, Inc.
- Ravi Bansal & Amir Yaron, 2004. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," Journal of Finance, American Finance Association, vol. 59(4), pages 1481-1509, 08.
- Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
- Ruslan Bikbov & Mikhail Chernov, 2010.
"No-arbitrage macroeconomic determinants of the yield curve,"
- Bikbov, Ruslan & Chernov, Mikhail, 2010. "No-arbitrage macroeconomic determinants of the yield curve," Journal of Econometrics, Elsevier, vol. 159(1), pages 166-182, November.
- James H. Stock & Mark W. Watson, 2006.
"Why Has U.S. Inflation Become Harder to Forecast?,"
NBER Working Papers
12324, National Bureau of Economic Research, Inc.
- Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
- Jacquier, Eric & Polson, Nicholas G & Rossi, Peter E, 1994.
"Bayesian Analysis of Stochastic Volatility Models,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 12(4), pages 371-89, October.
- Tom Doan, . "RATS programs to replicate Jacquier, Polson, Rossi (1994) stochastic volatility," Statistical Software Components RTZ00105, Boston College Department of Economics.
- Anh Le & Kenneth J. Singleton, 2010. "An Equilibrium Term Structure Model with Recursive Preferences," American Economic Review, American Economic Association, vol. 100(2), pages 557-61, May.
- Startz, Richard & Tsang, Kwok Ping, 2012.
"Nonexponential Discounting: A Direct Test And Perhaps A New Puzzle,"
University of California at Santa Barbara, Economics Working Paper Series
qt8pw4h6vk, Department of Economics, UC Santa Barbara.
- Startz Richard & Tsang Kwok Ping, 2012. "Nonexponential Discounting: A Direct Test And Perhaps A New Puzzle," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-35, November.
- Philippe Mueller & Andrea Vedolin & Hao Zhou, 2011. "Short Run Bond Risk Premia," FMG Discussion Papers dp686, Financial Markets Group.
- Stefano D'Addona & Frode Brevik, 2011. "Rational Ignorance In Long-Run Risk Models," Working Papers 0811, CREI Università degli Studi Roma Tre, revised 2011.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lu Dayrit).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.