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Pricing the term structure with linear regressions

  • Tobias Adrian
  • Emanuel Moench

We estimate the time series and cross section of bond returns by way of three-stage ordinary least squares, which we label dynamic Fama-MacBeth regressions. Our approach allows for estimation of models with a large number of pricing factors. Even though we do not impose yield cross-equation restrictions in the estimation, we show that our bond return regressions generate a term structure of interest rates with small yield errors when compared with commonly reported specifications. We uncover specifications that give rise to lower pricing errors than do commonly advocated specifications, both in- and out-of-sample. Efficiency can be obtained through the generalized method of moments (GMM) estimator.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 340.

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Date of creation: 2008
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Handle: RePEc:fip:fednsr:340
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