A specification analysis of discrete-time no-arbitrage term structure models with observable and unobservable factors

Marcello Pericoli () and Marco Taboga ()

MPRA Paper from University Library of Munich, Germany

Abstract: We derive a canonical representation for the no-arbitrage discrete-time term structure models with both observable and unobservable state variables, popularized by Ang and Piazzesi (2003). We conduct a specification analysis based on this canonical representation. We show that some of the restrictions commonly imposed in the literature, most notably that of independence between observable and unobservable variables, are not necessary for identification and are rejected by formal statistical tests. Furthermore, we show that there are important differences between the estimated risk premia, impulse response functions and variance decomposition of unrestricted models, parametrized according to our canonical representation, and those of models with overidentifying restrictions.

Keywords: Term structure; canonical models (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm
Date: 2005-03, Revised 2007-09
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