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Why Gaussian macro-finance term structure models are (nearly) unconstrained factor-VARs

  • Joslin, Scott
  • Le, Anh
  • Singleton, Kenneth J.
Registered author(s):

    This paper explores the implications of filtering and no-arbitrage for the maximum likelihood estimates of the entire conditional distribution of the risk factors and bond yields in Gaussian macro-finance term structure model (MTSM) when all yields are priced imperfectly. For typical yield curves and macro-variables studied in this literature, the estimated joint distribution within a canonical MTSM is nearly identical to the estimate from an economic-model-free factor vector-autoregression (factor-VAR), even when measurement errors are large. It follows that a canonical MTSM offers no new insights into economic questions regarding the historical distribution of the macro risk factors and yields, over and above what is learned from a factor-VAR. These results are rotation-invariant and, therefore, apply to many of the specifications in the literature.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X13001116
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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 109 (2013)
    Issue (Month): 3 ()
    Pages: 604-622

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    Handle: RePEc:eee:jfinec:v:109:y:2013:i:3:p:604-622
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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