Estimating the Term Premium by a Markov Switching Model with ARMA-GARCH Errors
We estimate the term premium in the term structure of risk-free interest rates using a Markov switching model with ARMA-GARCH errors. We find that the Markov switching term premium is closely related to the U.S. business cycle and plays a significant role in explaining changes in short-term interest rates. The result is not affected even when we consider other macro variables or excess return forecasting factors. In order to estimate the Markov switching model with the non-Markovian structure, we propose a new Bayesian approach by which we do not need to approximate the likelihood function and we generate the state variable using a Gibbs sampler.
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Volume (Year): 14 (2010)
Issue (Month): 2 (March)
Pages: 1-20
| Handle: | RePEc:bpj:sndecm:v:14:y:2010:i:2:n:4 |
| Contact details of provider: | Web page: https://www.degruyter.com
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| Order Information: | Web: https://www.degruyter.com/view/j/snde |
References listed on IDEAS
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- Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
- Ang, Andrew & Piazzesi, Monika, 2003.
"A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables,"
Journal of Monetary Economics,
Elsevier, vol. 50(4), pages 745-787, May.
- Andrew Ang & Monika Piazzesi, 2001. "A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables," NBER Working Papers 8363, National Bureau of Economic Research, Inc.
- Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
- Nakatsuma, Teruo, 2000. "Bayesian analysis of ARMA-GARCH models: A Markov chain sampling approach," Journal of Econometrics, Elsevier, vol. 95(1), pages 57-69, March. Full references (including those not matched with items on IDEAS)
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