Expectations, risk premia and information spanning in dynamic term structure model estimation

Rodrigo Guimaraes

No 489, Bank of England working papers from Bank of England

Abstract: This article examines the nature of the empirical instability in dynamic term structure models. I show that using survey forecasts is an effective solution because it directly addresses the information imbalance at the heart of the instability: it increases the (cross-section) information on actual dynamics, bridging the gap with the large (cross-section) information on the risk-adjusted dynamics. I relate this to other information spanning problems, particularly spanning of macro factors, and discuss the desirability of anchoring models to surveys. I also show that restricting prices of risk is not effective in ensuring stable and sensible implied expectations.

Keywords: Interest rates; expectations; risk premium; dynamic term structure; robust; estimation (search for similar items in EconPapers)
JEL-codes: C58 E43 G12 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2014-03-28
New Economics Papers: this item is included in nep-cfn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0489

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