Stochastic Volatility in a Macro-Finance Model of the US Term Structure of Interest Rates 1961-2004
AbstractThis paper generalizes the standard homoscedastic macro-finance model by allowing for stochastic volatility, using the ‘square root’ specification of the mainstreamfinance literature. Empirically, this specification dominates the standard model because it is consistent with the square root volatility found in macroeconomic time series. Thus it establishes an important connection between the stochastic volatility of the mainstream finance model and macroeconomic volatility of the Okun (1971) - Friedman (1977) type. This research opens the way to a richer specification of both macroeconomic and term structure models, incorporating the best features of both macro-finance and mainstream-finance models.
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Bibliographic InfoPaper provided by Department of Economics, University of York in its series Discussion Papers with number 07/32.
Date of creation: Nov 2007
Date of revision:
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Macro-finance; affine term structure; heteroscedasticity;
Other versions of this item:
- Peter D. Spencer, 2008. "Stochastic Volatility in a Macro-Finance Model of the U.S. Term Structure of Interest Rates 1961-2004," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(6), pages 1177-1215, 09.
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- Spencer, Peter & Liu, Zhuoshi, 2010.
"An open-economy macro-finance model of international interdependence: The OECD, US and the UK,"
Journal of Banking & Finance,
Elsevier, vol. 34(3), pages 667-680, March.
- Peter Spencer & Zhuoshi Liu, . "An Open-Economy Macro-Finance Model of Internatinal Interdependence: The OECD, US and the UK," Discussion Papers 09/16, Department of Economics, University of York.
- Massimo Guidolin & Daniel L. Thornton, 2010. "Predictions of short-term rates and the expectations hypothesis," Working Papers 2010-013, Federal Reserve Bank of St. Louis.
- Peter N. Ireland, 2014. "Monetary Policy, Bond Risk Premia, and the Economy," Boston College Working Papers in Economics 852, Boston College Department of Economics.
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