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Term Structure Estimation with Survey Data on Interest Rate Forecasts

Don H. Kim and Athanasios Orphanides ()

Journal of Financial and Quantitative Analysis, 2012, vol. 47, issue 01, 241-272

Abstract: The estimation of dynamic no-arbitrage term structure models with a flexible specification of the market price of risk is beset by severe small-sample problems arising from the highly persistent nature of interest rates. We propose using survey forecasts of a short-term interest rate as an additional input to the estimation to overcome the problem. To illustrate the methodology, we estimate the 3-factor affine-Gaussian model with U.S. Treasury yields data and demonstrate that incorporating information from survey forecasts mitigates the small-sample problem. The model thus estimated for the 1990–2003 sample generates a stable and sensible estimate of the expected path of the short rate, reproduces the well-known stylized patterns in the expectations hypothesis tests, and captures some of the short-run variations in the survey forecast of the changes in longer-term interest rates.

Date: 2012
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Working Paper: Term Structure Estimation with Survey Data on Interest Rate Forecasts (2005) Downloads
Working Paper: Term structure estimation with survey data on interest rate forecasts (2005) Downloads
Working Paper: Term Structure Estimation with Survey Data on Interest Rate Forecasts (2005)
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