Modeling the Term Structure of Interest Rates: Where Do We Stand?
AbstractNo-arbitrage term structure models are becoming increasingly important to policy makers and practitioners alike. Several factors justify this trend. First, modeling progress has been tremendous over the last years, allowing a much better fit of actual yield curve dynamics and increased model realism (see Dai and Singleton (2002a,b)). Second, increases in computing power allow the efficient panel estimation of term structure models. Given that term structure models have implications for both the cross-section and time series dimension of yields, panel estimation techniques are to be preferred over either crosssection or time series techniques. Third, term structure models have recently been extended in ways that are of direct interest to policy makers. Example given, Dewachter and Maes (2001) model the international term structure of interest rates, taking into account the role of the exchange rate in a no-arbitrage economy, while amongst others Hördahl et al. (2002) and Dewachter et al. (2002) jointly model the term structure of interest rates with the dynamics of macroeconomic variables. The latter approach allows to study (i) the driving factors behind the term structure and the risk premia in terms of clearly interpretable macroeconomic variables and their determinants, and (ii) the effects of monetary policy on the term structure of interest rates and macroeconomic variables within a consistent no-arbitrage framework.
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Bibliographic InfoPaper provided by National Bank of Belgium in its series Working Paper Research with number 42.
Length: 54 pages
Date of creation: Feb 2004
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Other versions of this item:
- Konstantijn Maes & Konstantijn Maes, 2003. "Modeling the Term Structure of Interest Rates: Where Do We Stand?," International Economics Working Papers Series wpie008, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics.
- NEP-ALL-2004-09-30 (All new papers)
- NEP-IFN-2004-09-30 (International Finance)
- NEP-MON-2004-09-30 (Monetary Economics)
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- Joseph G. Haubrich & George Pennacchi & Peter Ritchken, 2008. "Estimating real and nominal term structures using Treasury yields, inflation, inflation forecasts, and inflation swap rates," Working Paper 0810, Federal Reserve Bank of Cleveland.
- Felix Geiger, 2009. "International Interest-Rate Risk Premia in Affine Term Structure Models," Diskussionspapiere aus dem Institut fÃ¼r Volkswirtschaftslehre der UniversitÃ¤t Hohenheim 316/2009, Department of Economics, University of Hohenheim, Germany.
- Sanford, Andrew D. & Martin, Gael M., 2005. "Simulation-based Bayesian estimation of an affine term structure model," Computational Statistics & Data Analysis, Elsevier, vol. 49(2), pages 527-554, April.
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