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

  • Taeyoung Doh

    (Federal Reserve Bank of Kansas City)

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.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 137.

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Date of creation: 2008
Date of revision:
Handle: RePEc:red:sed008:137
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. 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 937-69, July.
  2. Ruslan Bikbov & Mikhail Chernov, 2010. "No-arbitrage macroeconomic determinants of the yield curve," Post-Print peer-00732517, HAL.
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  8. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
  9. James H. Stock & Mark W. Watson, 2006. "Why Has U.S. Inflation Become Harder to Forecast?," NBER Working Papers 12324, National Bureau of Economic Research, Inc.
  10. Monika Piazzesi & Martin Schneider, 2009. "Trend and cycle in bond premia," Staff Report 424, Federal Reserve Bank of Minneapolis.
  11. 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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