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Flexible time series models for subjective distribution estimation with monetary policy in view

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  • Dominique Guegan

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

  • Florian Ielpo

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

Abstract

In this paper, we introduce a new approach to estimate the subjective distribution of the future short rate from the historical dynamics of futures, based on a model generated by a Normal Inverse Gaussian distribution, with dynamical parameters. The model displays time varying conditional volatility, skewness and kurtosis and provides a flexible framework to recover the conditional distribution of the future rates. For the estimation, we use maximum likelihood method. Then, we apply the model to Fed Fund futures and discuss its performance.

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Bibliographic Info

Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00188247.

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Date of creation: Oct 2007
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Handle: RePEc:hal:cesptp:halshs-00188247

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Keywords: Subjective distribution; autoregressive conditional density; generalized hyperbolic distribution; Fed Funds futures contracts.;

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  1. Piazzesi, Monika & Swanson, Eric T., 2008. "Futures prices as risk-adjusted forecasts of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(4), pages 677-691, May.
  2. Jackwerth, Jens Carsten, 2000. "Recovering Risk Aversion from Option Prices and Realized Returns," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 13(2), pages 433-51.
  3. John C. Robertson & Daniel L. Thornton, 1997. "Using federal funds futures rates to predict Federal Reserve actions," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Nov, pages 45-53.
  4. Ielpo, Florian & Guégan, Dominique, 2006. "An econometric specification of monetary policy dark art," MPRA Paper 1004, University Library of Munich, Germany, revised 07 Oct 2006.
  5. John B. Carlson & William R. Melick & Erkin Y. Sahinoz, 2003. "An option for anticipating Fed action," Economic Commentary, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Sep.
  6. Ait-Sahalia, Yacine & Lo, Andrew W., 2000. "Nonparametric risk management and implied risk aversion," Journal of Econometrics, Elsevier, Elsevier, vol. 94(1-2), pages 9-51.
  7. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 987-1007, July.
  8. Marie Briere, 2006. "Market Reactions to Central Bank Communication Policies :Reading Interest Rate Options Smiles," Working Papers CEB, ULB -- Universite Libre de Bruxelles 38, ULB -- Universite Libre de Bruxelles.
  9. Rosenberg, Joshua V. & Engle, Robert F., 2002. "Empirical pricing kernels," Journal of Financial Economics, Elsevier, Elsevier, vol. 64(3), pages 341-372, June.
  10. Morten B. Jensen & Asger Lunde, 2001. "The NIG-S&ARCH model: a fat-tailed, stochastic, and autoregressive conditional heteroskedastic volatility model," Econometrics Journal, Royal Economic Society, Royal Economic Society, vol. 4(2), pages 10.
  11. Hansen, B.E., 1992. "Autoregressive Conditional Density Estimation," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 322, University of Rochester - Center for Economic Research (RCER).
  12. Jondeau, Eric & Rockinger, Michael, 2003. "Conditional volatility, skewness, and kurtosis: existence, persistence, and comovements," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 27(10), pages 1699-1737, August.
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Cited by:
  1. Chevallier, Julien & Ielpo, Florian & Mercier, Ludovic, 2009. "Risk aversion and institutional information disclosure on the European carbon market : a case-study of the 2006 compliance event," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/4221, Paris Dauphine University.

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