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Long-term Yields Implied by Stochastic Discount Factor Decompositions

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  • Almeida, Caio
  • Cordeiro, Fernando

Abstract

We use the framework developed by Christensen (2017) and Hansen and Scheinkman (2009) to study the long-term interest rates in the US and Brazil. We apply a nonparametric estimator to US and Brazilian data to identify how the yield of a long-term zero-coupon bond responds to the initial state of the economy. Using a flexible specification for the state process leads to an interesting non-linear response of the yield to changes in the initial state. As a by-product of our work, we assess the performance of Christensen's estimator using Monte Carlo simulations based on two widely adopted asset pricing models (rare disasters and habit formation).

Suggested Citation

  • Almeida, Caio & Cordeiro, Fernando, 2019. "Long-term Yields Implied by Stochastic Discount Factor Decompositions," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 39(1), July.
    • Handle: RePEc:sbe:breart:v:39:y:2019:i:1:a:76365
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    References listed on IDEAS

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    1. Steve Ross, 2015. "The Recovery Theorem," Journal of Finance, American Finance Association, vol. 70(2), pages 615-648, April.
    2. Timothy Christensen, 2014. "Nonparametric Stochastic Discount Factor Decomposition," Papers 1412.4428, arXiv.org, revised May 2017.
    3. Lars Peter Hansen & John C. Heaton & Nan Li, 2008. "Consumption Strikes Back? Measuring Long-Run Risk," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 260-302, April.
    4. Christian Gollier, 2008. "Discounting with fat-tailed economic growth," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 171-186, December.
    5. Christian Gollier & James K. Hammitt, 2014. "The Long-Run Discount Rate Controversy," Annual Review of Resource Economics, Annual Reviews, vol. 6(1), pages 273-295, October.
    6. Jose Scheinkman, 2008. "Long Term Risk," Annual Meeting Plenary 2008-2, Society for Economic Dynamics.
    7. Christian Gollier, 2014. "Discounting and Growth," American Economic Review, American Economic Association, vol. 104(5), pages 534-537, May.
    8. Almeida, Caio & Brandao, Diego, 2019. "Measuring Long Run Risks for Brazil," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 39(1), July.
    9. repec:dau:papers:123456789/2282 is not listed on IDEAS
    10. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
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