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Estimating Impact of Age Distribution on Bond Pricing: A Semiparametric Functional Data Analysis Approach

Author

Listed:
  • Zongwu Cai

    (Department of Economics, The University of Kansas, Lawrence, KS 66045, USA)

  • Jiazi Chen

    (The Wang Yanan Institute for Studies in Economics, Xiamen University, Xiamen, Fujian 361005, China)

  • Linlin Liu

    (The Wang Yanan Institute for Studies in Economics, Xiamen University, Xiamen, Fujian 361005, China and MOE Key Lab of Econometrics and School of Economics, Xiamen University, Xiamen, Fujian 361005, China)

Abstract

This paper proposes a semiparametric functional data model to estimate the impact of demographic age distribution on interest rate term structure through an innovative functional affine term structure, which fully exploits the information efficiency in both structures. The framework consistently explains the age distribution impact on the persistence in yields via both channels of real rate and inflation, supporting the long run Fisher relationship and the life cycle hypothesis. Structural information in yields also helps to strongly identify the demographic impact function, which results in remarkable fit of the yield curve with counter-cyclical risk premia and more accurate out-of-sample forecast than alternative models.

Suggested Citation

  • Zongwu Cai & Jiazi Chen & Linlin Liu, 2021. "Estimating Impact of Age Distribution on Bond Pricing: A Semiparametric Functional Data Analysis Approach," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 202102, University of Kansas, Department of Economics, revised Jan 2021.
    • Handle: RePEc:kan:wpaper:202102
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    More about this item

    Keywords

    Demographic distribution; Life cycle; Term structure models; Semi-parametric model; Functional data analysis;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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