Modeling persistent interest rates with double-autoregressive processes

Anne Lundgaard Hansen

Journal of Banking & Finance, 2021, vol. 133, issue C

Abstract: We propose a term structure model featuring double-autoregressive dynamics, which can accommodate unit roots and cointegrating relations while maintaining stationarity. In an empirical application, the model reduces in-sample misspecification and significantly improves out-of-sample yield forecasts compared with term structure models based on linear VAR dynamics. The double-autoregressive process implies term premia that resemble the term spread. We test whether these premia help in overcoming the persistence problem of stationary VAR models with mixed results. Finally, we discuss alternative interpretations of the mechanism inducing stationarity in our model.

Keywords: Yield curve; Unit roots; Cointegration; Persistence problem; Volatility-induced stationarity; Random coefficient vector autoregression; Macro-finance term structure model (search for similar items in EconPapers)
JEL-codes: E43 E44 G12 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:133:y:2021:i:c:s0378426621002545

DOI: 10.1016/j.jbankfin.2021.106302

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