Bond Risk Premia Forecasting: A Simple Approach for Extracting¨Macroeconomic Information from a Panel of Indicators
AbstractWe propose a simple but effective estimation procedure to extract the level and the volatility dynamics of a latent macroeconomic factor from a panel of observable indicators. Our approach is based on a multivariate conditionally heteroskedastic exact factor model that can take into account the heteroskedasticity feature shown by most macroeconomic variables and relies on an iterated Kalman filter procedure. In simulations we show the unbiasedness of the proposed estimator and its superiority to different approaches introduced in the literature. Simulation results are confirmed in applications to real inflation data with the goal of forecasting long-term bond risk premia. Moreover, we find that the extracted level and conditional variance of the latent factor for inflation are strongly related to NBER business cycles.
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Bibliographic InfoPaper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2010 with number 2010-09.
Length: 24 pages
Date of creation: Mar 2010
Date of revision:
Macroeconomic variables; Exact factor model; Kalman filter; Heteroskedasticity; Forecasting bond risk premia; Inflation measures; Business cycles;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-11 (All new papers)
- NEP-ECM-2010-04-11 (Econometrics)
- NEP-FOR-2010-04-11 (Forecasting)
- NEP-UPT-2010-04-11 (Utility Models & Prospect Theory)
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