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Term Structure Estimation with Survey Data on Interest Rate Forecasts

  • Athanasios Orphanides
  • Don H. Kim

    ()

    (Division of Monetary Affairs Federal Reserve Board)

The estimation of dynamic term structure models with flexible specification of market price of risk is beset by a severe small-sample problem arising from the highly persistent nature of interest rates. We propose to use survey data on the forecast of short-term interest rates as an additional input in the estimation to overcome the problem. The 3-factor pure-Gaussian model, thus estimated with the US Treasuries term structure for the 1990-2004 period, generates a stable estimate of expected path of the short-term interest rate, reproduces the well-known stylized patterns in the expectations hypothesis tests, and captures a large part of the short-run variations in the survey forecast of changes in longer-term interest rates

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 474.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:474
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