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A Nonlinear Expectations Model of the Term Structure of Interest Rates with Time-Varying Risk Premia

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  • Lee, Bong-Soo

Abstract

A nonlinear expectations model of the term structure with time-varying risk premia is specified, estimated, and tested, allowing for conditional heteroskedasticity and serial correlation in the disturbance terms. The model is subsequently linearized by means of a stationary, lognormal distributional assumption, and a constant risk premium results. Relative to the nonlinear model, the loglinear model performs poorly. Further investigation suggests the importance of taking both a time-varying risk premium and conditional heteroskedasticity in disturbance terms into account when formulating and estimating the term structure. Copyright 1989 by Ohio State University Press.

Suggested Citation

  • Lee, Bong-Soo, 1989. "A Nonlinear Expectations Model of the Term Structure of Interest Rates with Time-Varying Risk Premia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(3), pages 348-367, August.
    • Handle: RePEc:mcb:jmoncb:v:21:y:1989:i:3:p:348-67
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    Cited by:

    1. Canova, Fabio & Marrinan, Jane, 1996. "Reconciling the term structure of interest rates with the consumption-based ICAP model," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 709-750, April.

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