Stochastic Volatility in a Macro-Finance Model of the US Term Structure of Interest Rates 1961-2004

Peter Spencer

Discussion Papers from Department of Economics, University of York

Abstract: This paper generalizes the standard homoscedastic macro-finance model by allowing for stochastic volatility, using the ‘square root’ specification of the mainstreamfinance literature. Empirically, this specification dominates the standard model because it is consistent with the square root volatility found in macroeconomic time series. Thus it establishes an important connection between the stochastic volatility of the mainstream finance model and macroeconomic volatility of the Okun (1971) - Friedman (1977) type. This research opens the way to a richer specification of both macroeconomic and term structure models, incorporating the best features of both macro-finance and mainstream-finance models.

Keywords: Macro-finance; affine term structure; heteroscedasticity (search for similar items in EconPapers)
Date: 2007-11
New Economics Papers: this item is included in nep-mac
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Related works:
Journal Article: Stochastic Volatility in a Macro-Finance Model of the U.S. Term Structure of Interest Rates 1961-2004 (2008)
Journal Article: Stochastic Volatility in a Macro‐Finance Model of the U.S. Term Structure of Interest Rates 1961–2004 (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:07/32

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