Efficient bond price approximations in non-linear equilibrium-based term structure models

Andreasen Martin M. () and Pawel Zabczyk
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Andreasen Martin M.: CCBS, Bank of England and Centre for Macroeconomics, Bank of England, Threadneedle Street, London, EC2R 8AH, UK

Studies in Nonlinear Dynamics & Econometrics, 2015, vol. 19, issue 1, 1-33

Abstract: This paper develops an efficient method to compute higher-order perturbation approximations of bond prices. At third order, our approach can significantly shorten the approximation process and its precision exceeds the log-normal method and a procedure using consol bonds. The efficiency gains greatly facilitate any estimation which is illustrated by considering a long-run risk model for the US. Allowing for an unconstrained intertemporal elasticity of substitution enhances the model’s fit, and we see further improvements when incorporating stochastic volatility and external habits.

Keywords: DSGE model; habit model; higher order perturbation method; long-run risk; stochastic volatility (search for similar items in EconPapers)
JEL-codes: C68 E0 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (6)

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DOI: 10.1515/snde-2012-0005

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