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Pricing the term structure with linear regressions

Author

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  • Tobias Adrian
  • Emanuel Moench

Abstract

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.

Suggested Citation

  • Tobias Adrian & Emanuel Moench, 2008. "Pricing the term structure with linear regressions," Staff Reports 340, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:340
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    More about this item

    Keywords

    Rate of return; Bonds; Interest rates; Econometric models; Regression analysis;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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