An Equilibrium Model of the Term Structure of Interest Rates: Recursive Preferences at Play
AbstractIn this paper we analyze the performance of an equilibrium model of the term structure of the interest rate under Epstein-Zin/Weil preferences in which consumption growth and inflation follow a VAR process with logistic stochastic volatility. We find that the model can successfully reproduce the first moment of yields and their persistence, but fails to reproduce their standard deviation. The filtered stochastic volatility is a good indicator of crises and shows high persistence, but it is not enough to generate a slowly decaying volatility of yields with respect to maturity. Preference parameters are estimated to be about 4 for the coefficient of relative risk aversion and infinity for the elasticity of intertemporal substitution.
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 University Library of Munich, Germany in its series MPRA Paper with number 19153.
Date of creation: 10 Dec 2009
Date of revision:
Yield curve; Recursive preferences; Logistic stochastic volatility; Nonlinear Kalman filter; Quadrature-based methods.;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-12-19 (All new papers)
- NEP-MAC-2009-12-19 (Macroeconomics)
- NEP-MON-2009-12-19 (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.:
- Marimon, Ramon & Scott, Andrew (ed.), 1999. "Computational Methods for the Study of Dynamic Economies," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198294979, October.
- Craig Burnside, 1998. "Discrete State-Space Methods for the Study of Dynamic Economies," QM&RBC Codes, Quantitative Macroeconomics & Real Business Cycles 125, Quantitative Macroeconomics & Real Business Cycles.
- Burnside, Craig, 1993. "Consistency of a Method of Moments Estimator Based on Numerical Solutions to Asset Pricing Models," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 9(04), pages 602-632, August.
- David K. Backus & Allan W. Gregory & Stanley E. Zin, 1986.
"Risk Premiums in the Term Structure : Evidence from Artificial Economies,"
Working Papers, Queen's University, Department of Economics
665, Queen's University, Department of Economics.
- Backus, David K. & Gregory, Allan W. & Zin, Stanley E., 1989. "Risk premiums in the term structure : Evidence from artificial economies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 24(3), pages 371-399, November.
- Wachter, Jessica A., 2006. "A consumption-based model of the term structure of interest rates," Journal of Financial Economics, Elsevier, Elsevier, vol. 79(2), pages 365-399, February.
- Michael F. Gallmeyer & Burton Hollifield & Francisco Palomino & Stanley E. Zin, 2007.
"Arbitrage-Free Bond Pricing with Dynamic Macroeconomic Models,"
NBER Working Papers
13245, National Bureau of Economic Research, Inc.
- Michael F. Gallmeyer & Burton Hollifield & Francisco J. Palomino & Stanley E. Zin, 2007. "Arbitrage-free bond pricing with dynamic macroeconomic models," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jul, pages 305-326.
- Monika Piazzesi & Martin Schneider, 2006.
"Equilibrium Yield Curves,"
NBER Working Papers
12609, National Bureau of Economic Research, Inc.
- Monika Piazzesi & Martin Schneider, 2007. "Equilibrium Yield Curves," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2006, Volume 21, pages 389-472 National Bureau of Economic Research, Inc.
- David K. Backus & Stanley E. Zin, 1994.
"Reverse Engineering the Yield Curve,"
Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics
94-09, New York University, Leonard N. Stern School of Business, Department of Economics.
- Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 371-96, March.
- Lee, Bong-Soo & Ingram, Beth Fisher, 1991. "Simulation estimation of time-series models," Journal of Econometrics, Elsevier, Elsevier, vol. 47(2-3), pages 197-205, February.
- Canova, Fabio & Marrinan, Jane, 1996. "Reconciling the term structure of interest rates with the consumption-based ICAP model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 20(4), pages 709-750, April.
- Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2013. "On the Stratonovich – Kalman - Bucy filtering algorithm application for accurate characterization of financial time series with use of state-space model by central banks," MPRA Paper 50235, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.