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Structural Estimation of Dynamic Macroeconomic Models using Higher-Frequency Financial Data

Author

Listed:
  • Max Ole Liemen

    (Universität Hamburg)

  • Michel van der Wel

    (Erasmus University Rotterdam)

  • Olaf Posch

    (Universität Hamburg)

Abstract

In this paper we show how high-frequency financial data can be used in a combined macro-finance framework to estimate the underlying structural parameters. Our formulation of the model allows for substituting macro variables by asset prices in a way that enables casting the relevant estimation equations partly (or completely) in terms of financial data. We show that using only financial data allows for identification of the majority of the relevant parameters. Adding macro data allows for identification of all parameters. In our simulation study, we find that it also improves the accuracy of the parameter estimates. In the empirical application we use interest rate, macro, and S&P500 stock index data, and compare the results using different combinations of macro and financial variables.

Suggested Citation

  • Max Ole Liemen & Michel van der Wel & Olaf Posch, 2018. "Structural Estimation of Dynamic Macroeconomic Models using Higher-Frequency Financial Data," 2018 Meeting Papers 1049, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:1049
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    References listed on IDEAS

    as
    1. Glenn D. Rudebusch & Eric T. Swanson, 2012. "The Bond Premium in a DSGE Model with Long-Run Real and Nominal Risks," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 105-143, January.
    2. Christensen, Bent Jesper & Posch, Olaf & van der Wel, Michel, 2016. "Estimating dynamic equilibrium models using mixed frequency macro and financial data," Journal of Econometrics, Elsevier, vol. 194(1), pages 116-137.
    3. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    4. Bent Jesper Christensen & Olaf Posch & Michel van der Wel, 2011. "Estimating Dynamic Equilibrium Models using Macro and Financial Data," CREATES Research Papers 2011-21, Department of Economics and Business Economics, Aarhus University.
    5. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    Full references (including those not matched with items on IDEAS)

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