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Affine Macroeconomic Models of the Term Structure of Interest Rates: The US Treasury Market 1961-99

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  • Peter Spencer

Abstract

This paper develops a macroeconomic model of the yield curve and uses this to explain the behaviour of the US Treasury market. Unlike previous macro-finance models which assume a homoscedastic error process, I develop a general affine model which allows volatility to be conditioned by interest rates and other macroeconomic variables. Despite the extensive use of stochastic volatility models in mainstream finance papers and the overwhelming evidence of heteroscedasticity in macroeconomic and asset price data this is the first macro-finance model of the bond market with this feature. My preferred empirical specification uses a single conditioning factor and is thus the macro-finance analogue of the EA1 (N) specification of the mainstream finance literature. This model performs well in encompassing tests that lead to a decisive rejection of the standard EA0(N) macro-finance specification. The resulting specification provides a flexible 10-factor explanation of the behaviour of the US yield curve, keying it in to the behaviour of the macroeconomy.

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  • Peter Spencer, 2004. "Affine Macroeconomic Models of the Term Structure of Interest Rates: The US Treasury Market 1961-99," Discussion Papers 04/16, Department of Economics, University of York, revised Jan 2006.
    • Handle: RePEc:yor:yorken:04/16
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    Cited by:

    1. Peter Vlaar, 2007. "Term Structure Modeling for Pension Funds:What to do in Practice?," DNB Working Papers 123, Netherlands Central Bank, Research Department.
    2. Renatas Kizys & Peter Spencer, 2007. "Assessing the Relation between Equity Risk Premia and Macroeconomic Volatilities," Money Macro and Finance (MMF) Research Group Conference 2006 140, Money Macro and Finance Research Group.
    3. Somvang PHIMMAVONG & Ian FERGUSON & Barbara OZARSKA, 2010. "Economy-Wide Impact of Forest Plantation Development in Laos Using a Dynamic General Equilibrium Approach," EcoMod2010 259600131, EcoMod.
    4. Peter Spreij & Enno Veerman & Peter Vlaar, 2008. "Multivariate Feller conditions in term structure models: Why do(n't) we care?," Papers 0804.1039, arXiv.org.

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