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Long Run Risks in the Term Structure of Interest Rates : Estimation

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  • Taeyoung Doh

    (Federal Reserve Bank of Kansas City)

Abstract

This paper estimates a long run risk model with term structure data. Inflation and consumption growth both contain correlated long run risk components. The model is estimated by the likelihood-based Bayesian methods and estimates of the latent long run risk factors are extracted from both macro and term structure data. Empirical analysis using US data reveals that a small and persistent component in consumption growth interacting with expected inflation improves the model's fit for the term structure data.

Suggested Citation

  • Taeyoung Doh, 2008. "Long Run Risks in the Term Structure of Interest Rates : Estimation," 2008 Meeting Papers 137, Society for Economic Dynamics.
  • Handle: RePEc:red:sed008:137
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    References listed on IDEAS

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    1. Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez, 2007. "Estimating Macroeconomic Models: A Likelihood Approach," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1059-1087.
    2. Jacquier, Eric & Polson, Nicholas G & Rossi, Peter E, 2002. "Bayesian Analysis of Stochastic Volatility Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 69-87, January.
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    5. Bikbov, Ruslan & Chernov, Mikhail, 2010. "No-arbitrage macroeconomic determinants of the yield curve," Journal of Econometrics, Elsevier, vol. 159(1), pages 166-182, November.
    6. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
    7. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
    8. Benati, Luca, 2007. "The "Great Moderation" in the United Kingdom," Working Paper Series 769, European Central Bank.
    9. Monika Piazzesi & Martin Schneider, 2009. "Trend and cycle in bond premia," Staff Report 424, Federal Reserve Bank of Minneapolis.
    10. repec:bla:restud:v:65:y:1998:i:3:p:361-93 is not listed on IDEAS
    11. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-969, July.
    12. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, February.
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    Cited by:

    1. Philippe Mueller & Andrea Vedolin & Hao Zhou, 2011. "Short Run Bond Risk Premia," FMG Discussion Papers dp686, Financial Markets Group.
    2. Stefano D'Addona & Frode Brevik, 2011. "Rational Ignorance In Long-Run Risk Models," Working Papers 0811, CREI Università degli Studi Roma Tre, revised 2011.
    3. repec:eee:eecrev:v:95:y:2017:i:c:p:1-22 is not listed on IDEAS
    4. Anh Le & Kenneth J. Singleton, 2010. "An Equilibrium Term Structure Model with Recursive Preferences," American Economic Review, American Economic Association, vol. 100(2), pages 557-561, May.

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