Advanced Search
MyIDEAS: Login to save this paper or follow this series

Pricing the term structure with linear regressions

Contents:

Author Info

  • Tobias Adrian
  • Emanuel Moench

Abstract

We estimate the time series and cross section of bond returns by way of three-stage ordinary least squares, which we label dynamic Fama-MacBeth regressions. Our approach allows for estimation of models with a large number of pricing factors. Even though we do not impose yield cross-equation restrictions in the estimation, we show that our bond return regressions generate a term structure of interest rates with small yield errors when compared with commonly reported specifications. We uncover specifications that give rise to lower pricing errors than do commonly advocated specifications, both in- and out-of-sample. Efficiency can be obtained through the generalized method of moments (GMM) estimator.

Download Info

If 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.
File URL: http://www.newyorkfed.org/research/staff_reports/sr340.html
Download Restriction: no

File URL: http://www.newyorkfed.org/research/staff_reports/sr340.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 340.

as in new window
Length:
Date of creation: 2008
Date of revision:
Handle: RePEc:fip:fednsr:340

Contact details of provider:
Postal: 33 Liberty Street, New York, NY 10045-0001
Email:
Web page: http://www.newyorkfed.org/
More information through EDIRC

Order Information:
Email:
Web: http://www.ny.frb.org/rmaghome/staff_rp/

Related research

Keywords: Interest rates ; Econometric models ; Regression analysis ; Bonds ; Rate of return;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Kleibergen, Frank, 2009. "Tests of risk premia in linear factor models," Journal of Econometrics, Elsevier, vol. 149(2), pages 149-173, April.
  2. Scott Joslin & Kenneth J. Singleton & Haoxiang Zhu, 2011. "A New Perspective on Gaussian Dynamic Term Structure Models," Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 926-970.
  3. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
  4. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
  5. Hansen, Lars Peter & Jagannathan, Ravi, 1997. " Assessing Specification Errors in Stochastic Discount Factor Models," Journal of Finance, American Finance Association, vol. 52(2), pages 557-90, June.
  6. Don H. Kim & Jonathan H. Wright, 2005. "An arbitrage-free three-factor term structure model and the recent behavior of long-term yields and distant-horizon forward rates," Finance and Economics Discussion Series 2005-33, Board of Governors of the Federal Reserve System (U.S.).
  7. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
  8. Moench, Emanuel, 2008. "Forecasting the yield curve in a data-rich environment: A no-arbitrage factor-augmented VAR approach," Journal of Econometrics, Elsevier, vol. 146(1), pages 26-43, September.
  9. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
  10. Hamilton, James D. & Wu, Jing Cynthia, 2012. "Identification and estimation of Gaussian affine term structure models," Journal of Econometrics, Elsevier, vol. 168(2), pages 315-331.
  11. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
  12. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
  13. John Y. Campbell & Robert J. Shiller, 1989. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," NBER Working Papers 3153, National Bureau of Economic Research, Inc.
  14. Martin D. D. Evans, 2003. "Real risk, inflation risk, and the term structure," Economic Journal, Royal Economic Society, vol. 113(487), pages 345-389, 04.
  15. Qiang Dai & Kenneth J. Singleton, 2000. "Specification Analysis of Affine Term Structure Models," Journal of Finance, American Finance Association, vol. 55(5), pages 1943-1978, October.
  16. Greg Duffee, 2010. "Sharpe ratios in term structure models," Economics Working Paper Archive 575, The Johns Hopkins University,Department of Economics.
  17. Francis X. Diebold & Canlin Li, 2003. "Forecasting the Term Structure of Government Bond Yields," NBER Working Papers 10048, National Bureau of Economic Research, Inc.
  18. Qiang Dai & Kenneth Singleton, 2003. "Term Structure Dynamics in Theory and Reality," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 631-678, July.
  19. Dai, Qiang & Singleton, Kenneth J., 2002. "Expectation puzzles, time-varying risk premia, and affine models of the term structure," Journal of Financial Economics, Elsevier, vol. 63(3), pages 415-441, March.
  20. Gregory R. Duffee, 2011. "Information in (and not in) the Term Structure," Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 2895-2934.
  21. Jonathan H. Wright, 2011. "Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset," American Economic Review, American Economic Association, vol. 101(4), pages 1514-34, June.
  22. Pierre Collin-Dufresne & Robert S. Goldstein, 2002. "Do Bonds Span the Fixed Income Markets? Theory and Evidence for Unspanned Stochastic Volatility," Journal of Finance, American Finance Association, vol. 57(4), pages 1685-1730, 08.
  23. Gurkaynak, Refet S. & Sack, Brian & Wright, Jonathan H., 2007. "The U.S. Treasury yield curve: 1961 to the present," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2291-2304, November.
  24. Sydney C. Ludvigson & Serena Ng, 2009. "Macro Factors in Bond Risk Premia," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5027-5067, December.
  25. John H. Cochrane & Monika Piazzesi, 2005. "Bond Risk Premia," American Economic Review, American Economic Association, vol. 95(1), pages 138-160, March.
  26. Darrell Duffie & Rui Kan, 1996. "A Yield-Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 6(4), pages 379-406.
  27. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Antonio Diez de los Rios, 2013. "A New Linear Estimator for Gaussian Dynamic Term Structure Models," Working Papers 13-10, Bank of Canada.
  2. Tobias Adrian & Erkko Etula & Hyun Song Shin, 2009. "Global liquidity and exchange rates," Staff Reports 361, Federal Reserve Bank of New York.
  3. Eric Ghysels & Casidhe Horan & Emanuel Moench, 2012. "Forecasting through the rear-view mirror: data revisions and bond return predictability," Staff Reports 581, Federal Reserve Bank of New York.
  4. Phurichai Rungcharoenkitkul, 2011. "Risk Sharing and Financial Contagion in Asia," IMF Working Papers 11/242, International Monetary Fund.
  5. Rebecca Hellerstein, 2011. "Global bond risk premiums," Staff Reports 499, Federal Reserve Bank of New York.
  6. Fricke, Christoph, 2012. "Expected and unexpected bond excess returns: Macroeconomic and market microstructure effects," Hannover Economic Papers (HEP) dp-493, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  7. Tobias Adrian & Daniel Covitz & Nellie Liang, 2013. "Financial stability monitoring," Finance and Economics Discussion Series 2013-21, Board of Governors of the Federal Reserve System (U.S.).
  8. Olena Chyruk & Luca Benzoni & Andrea Ajello, 2012. "Core and `Crust': Consumer Prices and the Term Structure of Interest Rates," 2012 Meeting Papers 922, Society for Economic Dynamics.
  9. Miguel A. Segoviano Basurto & Carlos Caceres & Vincenzo Guzzo, 2010. "Sovereign Spreads," IMF Working Papers 10/120, International Monetary Fund.
  10. Emanuel Moench & James Vickery & Diego Aragon, 2010. "Why is the market share of adjustable-rate mortgages so low?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 16(Dec).
  11. Adrian, Tobias & Etula, Erkko & Groen, Jan J.J., 2011. "Financial amplification of foreign exchange risk premia," European Economic Review, Elsevier, vol. 55(3), pages 354-370, April.
  12. Alexander Guarín & José Fernando Moreno & Hernando Vargas, 2014. "An Empirical Analysis of the Relationship between US and Colombian Long-Term Sovereign Bond Yields," Borradores de Economia 822, Banco de la Republica de Colombia.
  13. Michael Abrahams & Tobias Adrian & Richard K. Crump & Emanuel Moench, 2012. "Pricing TIPS and treasuries with linear regressions," Staff Reports 570, Federal Reserve Bank of New York.
  14. Alexander Guarín & José Fernando Moreno & Hernando Vargas, 2014. "An Empirical Analysis of the Relationship between US and Colombian Long-Term Sovereign Bond Yields?," BORRADORES DE ECONOMIA 011311, BANCO DE LA REPÚBLICA.
  15. Juneja, Januj, 2014. "Term structure estimation in the presence of autocorrelation," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 119-129.
  16. Hyun Song Shin & Erkko Etula & Tobias Adrian, 2010. "Risk Appetite and Exchange Rates," 2010 Meeting Papers 311, Society for Economic Dynamics.
  17. Durham, J. Benson, 2013. "Another view on U.S. Treasury term premiums," Staff Reports 658, Federal Reserve Bank of New York.
  18. Dániel Horváth & Péter Kálmán & Zalán Kocsis & Imre Ligeti, 2014. "What factors influence the yield curve?," MNB Bulletin, Magyar Nemzeti Bank (the central bank of Hungary), vol. 9(1), pages 28-39, March.
  19. Tobias Adrian & Erkko Etula, 2010. "Funding liquidity risk and the cross-section of stock returns," Staff Reports 464, Federal Reserve Bank of New York.
  20. Stijn Van Nieuwerburgh & Hanno Lustig & Ralph S.J. Koijen, 2009. "The Bond Risk Premium and the Cross-Section of Equity Returns," 2009 Meeting Papers 12, Society for Economic Dynamics.
  21. Erkko Etula, 2009. "Broker-dealer risk appetite and commodity returns," Staff Reports 406, Federal Reserve Bank of New York.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:340. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Farber).

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.