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Empirical Tests of Interest Rate Model Pricing Kernels

  • Joshua Rosenberg

This paper estimates and tests consumption-based pricing kernels used in common equilibrium interest rate term structure models. In contrast to previous papers that use return orthogonality conditions, estimation in this paper is accomplished using moment conditions from a consumption-based option pricing equation and market prices of interest rate options. This methodology is more sensitive to preference misspecification over states associated with large changes in consumption than previous techniques. In addition, this methodology provides a large set of natural moment conditions to use in estimation and testing compared to an arbitrary choice of return orthogonality conditions (e.g. instruments selected) used in GMM estimation.

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File URL: http://www.stern.nyu.edu/fin/workpapers/papers99/wpa99015.pdf
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File URL: http://www.stern.nyu.edu/fin/workpapers/papers99/wpa99015b.pdf
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Paper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 99-015.

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Date of creation: May 1999
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Handle: RePEc:fth:nystfi:99-015
Contact details of provider: Postal: U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126
Phone: (212) 998-0100
Web page: http://w4.stern.nyu.edu/finance/

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  1. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  2. Amin, Kaushik I & Ng, Victor K, 1997. "Inferring Future Volatility from the Information in Implied Volatility in Eurodollar Options: A New Approach," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 333-67.
  3. Jens Carsten Jackwerth, 1998. "Recovering Risk Aversion from Option Prices and Realized Returns," Finance 9803002, EconWPA.
  4. Longstaff, Francis A & Schwartz, Eduardo S, 1992. " Interest Rate Volatility and the Term Structure: A Two-Factor General Equilibrium Model," Journal of Finance, American Finance Association, vol. 47(4), pages 1259-82, September.
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  7. Boudoukh, Jacob, 1993. "An Equilibrium Model of Nominal Bond Prices with Inflation-Output Correlation and Stochastic Volatility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 636-65, August.
  8. Brennan, M J, 1979. "The Pricing of Contingent Claims in Discrete Time Models," Journal of Finance, American Finance Association, vol. 34(1), pages 53-68, March.
  9. Stapleton, Richard C & Subrahmanyam, Marti G, 1984. " The Valuation of Multivariate Contingent Claims in Discrete Time Models," Journal of Finance, American Finance Association, vol. 39(1), pages 207-28, March.
  10. Wilcox, David W, 1992. "The Construction of U.S. Consumption Data: Some Facts and Their Implications for Empirical Work," American Economic Review, American Economic Association, vol. 82(4), pages 922-41, September.
  11. Amin, Kaushik I & Ng, Victor K, 1993. " Option Valuation with Systematic Stochastic Volatility," Journal of Finance, American Finance Association, vol. 48(3), pages 881-910, July.
  12. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
  13. Constantinides, George M, 1992. "A Theory of the Nominal Term Structure of Interest Rates," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 531-52.
  14. John H. Cochrane & Lars Peter Hansen, 1992. "Asset Pricing Explorations for Macroeconomics," NBER Working Papers 4088, National Bureau of Economic Research, Inc.
  15. 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.
  16. Yacine Ait-Sahalia & Andrew W. Lo, 2000. "Nonparametric Risk Management and Implied Risk Aversion," NBER Working Papers 6130, National Bureau of Economic Research, Inc.
  17. Ferson, Wayne E., 1983. "Expectations of Real Interest Rates and Aggregate Consumption: Empirical Tests," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(04), pages 477-497, December.
  18. Rosenberg, Joshua V. & Engle, Robert F., 2002. "Empirical pricing kernels," Journal of Financial Economics, Elsevier, vol. 64(3), pages 341-372, June.
  19. Chapman, David A, 1997. " Approximating the Asset Pricing Kernel," Journal of Finance, American Finance Association, vol. 52(4), pages 1383-1410, September.
  20. Boyle, Phelim P., 1977. "Options: A Monte Carlo approach," Journal of Financial Economics, Elsevier, vol. 4(3), pages 323-338, May.
  21. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-84, March.
  22. Jin-Chuan Duan, 1995. "The Garch Option Pricing Model," Mathematical Finance, Wiley Blackwell, vol. 5(1), pages 13-32.
  23. Heaton, John, 1995. "An Empirical Investigation of Asset Pricing with Temporally Dependent Preference Specifications," Econometrica, Econometric Society, vol. 63(3), pages 681-717, May.
  24. Jacob Boudoukh, 1993. "An equilibrium model of nominal bond prices with inflation-output correlation and stochastic volatility," Proceedings, Federal Reserve Bank of Cleveland, pages 636-680.
  25. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
  26. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
  27. Barone-Adesi, Giovanni & Whaley, Robert E, 1987. " Efficient Analytic Approximation of American Option Values," Journal of Finance, American Finance Association, vol. 42(2), pages 301-20, June.
  28. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December.
  29. Gallant, A. Ronald & Hansen, Lars Peter & Tauchen, George, 1990. "Using conditional moments of asset payoffs to infer the volatility of intertemporal marginal rates of substitution," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 141-179.
  30. Bansal, Ravi & Viswanathan, S, 1993. " No Arbitrage and Arbitrage Pricing: A New Approach," Journal of Finance, American Finance Association, vol. 48(4), pages 1231-62, September.
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