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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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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
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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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  4. 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.
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  7. Chapman, David A, 1997. " Approximating the Asset Pricing Kernel," Journal of Finance, American Finance Association, vol. 52(4), pages 1383-1410, September.
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  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. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December.
  15. Heaton, John, 1995. "An Empirical Investigation of Asset Pricing with Temporally Dependent Preference Specifications," Econometrica, Econometric Society, vol. 63(3), pages 681-717, May.
  16. 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.
  17. 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.
  18. Ait-Sahalia, Yacine & Lo, Andrew W., 2000. "Nonparametric risk management and implied risk aversion," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 9-51.
  19. 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.
  20. John H. Cochrane & Lars Peter Hansen, 1992. "Asset Pricing Explorations for Macroeconomics," NBER Chapters, in: NBER Macroeconomics Annual 1992, Volume 7, pages 115-182 National Bureau of Economic Research, Inc.
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  22. Jin-Chuan Duan, 1995. "The Garch Option Pricing Model," Mathematical Finance, Wiley Blackwell, vol. 5(1), pages 13-32.
  23. 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.
  24. 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.
  25. 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.
  26. 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.
  27. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
  28. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
  29. 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.
  30. 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.
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