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Time-varying risk aversion and forecastability of the US term structure of interest rates

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  • Bouri, Elie
  • Gupta, Rangan
  • Majumdar, Anandamayee
  • Subramaniam, Sowmya

Abstract

We analyse the out-of-sample forecasting ability of a time-varying metric of risk aversion for the entire term structure of US Treasury securities as reflected by the three latent factors, level, slope and curvature. Daily data cover the out-of-sample period 22nd June 1988 to 3rd September 2020 within a quantiles-based framework. The results show statistically significant forecasting gains emanating from the inclusion of risk aversion for the tails of the conditional distributions of the quantiles-based models of the level, slope and curvature factors. The forecasting gains are shown in lower mean squared forecast errors at horizons of one-day, one-week, and one-month-ahead.

Suggested Citation

  • Bouri, Elie & Gupta, Rangan & Majumdar, Anandamayee & Subramaniam, Sowmya, 2021. "Time-varying risk aversion and forecastability of the US term structure of interest rates," Finance Research Letters, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:finlet:v:42:y:2021:i:c:s1544612321000052
    DOI: 10.1016/j.frl.2021.101924
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    1. Xu, Xin & Xu, Xiaoguang, 2023. "Monetary policy transmission modeling and policy responses," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Yield curve factors; Risk aversion; Out-of-sample forecasts;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • 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
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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