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Bayesian Factor Selection in Dynamic Term Structure Models

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  • Márcio Laurini

    (IBMEC Business School)

Abstract

This paper discusses Bayesian procedures for factor selection in dynamic term structure models through simulation methods based on Markov Chain Monte Carlo. The number of factors, besides influencing the fitting and prediction of observed yields, is also relevant to features such as the imposition of no-arbitrage conditions. We present a methodology for selecting the best specification in the Nelson-Siegel class of models using Reversible Jump MCMC.

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File URL: http://professores.ibmecrj.br/erg/dp/papers/dp201102.pdf
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Bibliographic Info

Paper provided by Economics Research Group, IBMEC Business School - Rio de Janeiro in its series IBMEC RJ Economics Discussion Papers with number 2011-02.

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Date of creation: 18 Apr 2011
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Handle: RePEc:ibr:dpaper:2011-02

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Web page: http://professores.ibmecrj.br/erg/
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Keywords: Dynamic Term Structure Models; Model Selection; Reversible Jump MCMC;

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  1. Frühwirth-Schnatter, Sylvia & Wagner, Helga, 2010. "Stochastic model specification search for Gaussian and partial non-Gaussian state space models," Journal of Econometrics, Elsevier, vol. 154(1), pages 85-100, January.
  2. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
  3. Jens H. E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, 2009. "An arbitrage-free generalized Nelson--Siegel term structure model," Econometrics Journal, Royal Economic Society, vol. 12(3), pages C33-C64, November.
  4. Jens H.E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, 2007. "The affine arbitrage-free class of Nelson-Siegel term structure models," Working Paper Series 2007-20, Federal Reserve Bank of San Francisco.
  5. Claeskens,Gerda & Hjort,Nils Lid, 2008. "Model Selection and Model Averaging," Cambridge Books, Cambridge University Press, number 9780521852258.
  6. Björk, Tomas & Christensen, Bent Jesper, 1997. "Interest Rate Dynamics and Consistent Forward Rate Curves," Working Paper Series in Economics and Finance 209, Stockholm School of Economics.
  7. 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.
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