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Testable implications of affine term structure models

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  • Hamilton, James D.
  • Wu, Jing Cynthia

Abstract

Affine term structure models have been used to address a wide range of questions in macroeconomics and finance. This paper investigates a number of their testable implications which have not previously been explored. We show that the assumption that certain specified yields are priced without error is testable, and find that the implied measurement or specification error exhibits serial correlation in all of the possible formulations investigated here. We further find that the predictions of these models for the average levels of different interest rates are inconsistent with the observed data, and propose a more general specification that is not rejected by the data.

Suggested Citation

  • Hamilton, James D. & Wu, Jing Cynthia, 2014. "Testable implications of affine term structure models," Journal of Econometrics, Elsevier, vol. 178(P2), pages 231-242.
  • Handle: RePEc:eee:econom:v:178:y:2014:i:p2:p:231-242
    DOI: 10.1016/j.jeconom.2013.08.024
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    Citations

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    Cited by:

    1. Creal, Drew D. & Wu, Jing Cynthia, 2015. "Estimation of affine term structure models with spanned or unspanned stochastic volatility," Journal of Econometrics, Elsevier, vol. 185(1), pages 60-81.
    2. Juneja, Januj A., 2016. "Financial crises and estimation bias in international bond markets," Research in International Business and Finance, Elsevier, vol. 38(C), pages 593-607.
    3. Yun, Tack & Kim, Jinsook & Ko, Eunmi, 2012. "The Role of Bounded Rationality in Macro-Finance Affine Term-Structure Models," MPRA Paper 44212, University Library of Munich, Germany.
    4. James D. Hamilton & Jing Cynthia Wu, 2012. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 3-46, February.
    5. Andreasen, Martin M. & Christensen, Bent Jesper, 2015. "The SR approach: A new estimation procedure for non-linear and non-Gaussian dynamic term structure models," Journal of Econometrics, Elsevier, vol. 184(2), pages 420-451.
    6. repec:eee:jfinec:v:125:y:2017:i:1:p:163-181 is not listed on IDEAS
    7. Martin M. Andreasen & Tom Engsted & Stig V. Møller & Magnus Sander, 2016. "Bond Market Asymmetries across Recessions and Expansions: New Evidence on Risk Premia," CREATES Research Papers 2016-26, Department of Economics and Business Economics, Aarhus University.
    8. repec:kap:rqfnac:v:50:y:2018:i:3:d:10.1007_s11156-017-0643-z is not listed on IDEAS
    9. Eran Raviv, 2013. "Prediction Bias Correction for Dynamic Term Structure Models," Tinbergen Institute Discussion Papers 13-041/III, Tinbergen Institute.
    10. Morris, Stephen D., 2017. "DSGE pileups," Journal of Economic Dynamics and Control, Elsevier, vol. 74(C), pages 56-86.
    11. Raviv, Eran, 2015. "Prediction bias correction for dynamic term structure models," Economics Letters, Elsevier, vol. 129(C), pages 112-115.
    12. Duan, Jin-Chuan, 2016. "Local-momentum autoregression and the modeling of interest rate term structure," Journal of Econometrics, Elsevier, vol. 194(2), pages 349-359.
    13. Zou, Tao & Chen, Song Xi, 2014. "Enhancing Estimation for Interest Rate Diffusion Models with Bond Prices," MPRA Paper 67073, University Library of Munich, Germany, revised Apr 2015.
    14. Januj Juneja, 2015. "An evaluation of alternative methods used in the estimation of Gaussian term structure models," Review of Quantitative Finance and Accounting, Springer, vol. 44(1), pages 1-24, January.
    15. Juneja, Januj, 2014. "Term structure estimation in the presence of autocorrelation," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 119-129.

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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