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The role of uncertainty in the term structure of interest rates: A GARCH-ATSM approach

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  • Junko Koeda
  • Ryo Kato

Abstract

This article examines the roles of uncertainties regarding various macro-variables in determining risk premiums of bond yields. We develop a multivariate GARCH-VAR to quantify uncertainties regarding inflation, real activities and monetary policy as time-varying conditional variances. We jointly estimate the multivariate GARCH and no-arbitrage bond pricing equations using a maximum likelihood method. The results indicate that the inflation uncertainty is the largest contributor to the dynamics of long-term yields since the 1980s, while the monetary policy uncertainty also plays noticeable roles.

Suggested Citation

  • Junko Koeda & Ryo Kato, 2015. "The role of uncertainty in the term structure of interest rates: A GARCH-ATSM approach," Applied Economics, Taylor & Francis Journals, vol. 47(34-35), pages 3710-3722, July.
  • Handle: RePEc:taf:applec:v:47:y:2015:i:34-35:p:3710-3722
    DOI: 10.1080/00036846.2015.1021454
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