An Equilibrium Model of the Term Structure of Interest Rates: Recursive Preferences at Play

Manuel González-Astudillo

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper we analyze the performance of an equilibrium model of the term structure of the interest rate under Epstein-Zin/Weil preferences in which consumption growth and inflation follow a VAR process with logistic stochastic volatility. We find that the model can successfully reproduce the first moment of yields and their persistence, but fails to reproduce their standard deviation. The filtered stochastic volatility is a good indicator of crises and shows high persistence, but it is not enough to generate a slowly decaying volatility of yields with respect to maturity. Preference parameters are estimated to be about 4 for the coefficient of relative risk aversion and infinity for the elasticity of intertemporal substitution.

Keywords: Yield curve; Recursive preferences; Logistic stochastic volatility; Nonlinear Kalman filter; Quadrature-based methods. (search for similar items in EconPapers)
JEL-codes: C32 E43 G12 (search for similar items in EconPapers)
Date: 2009-12-10
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:19153

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