 Why Gaussian macro-finance term structure models are (nearly) unconstrained factor-VARsScott Joslin, Anh Le and Kenneth Singleton Journal of Financial Economics, 2013, vol. 109, issue 3, 604-622 Abstract: This paper explores the implications of filtering and no-arbitrage for the maximum likelihood estimates of the entire conditional distribution of the risk factors and bond yields in Gaussian macro-finance term structure model (MTSM) when all yields are priced imperfectly. For typical yield curves and macro-variables studied in this literature, the estimated joint distribution within a canonical MTSM is nearly identical to the estimate from an economic-model-free factor vector-autoregression (factor-VAR), even when measurement errors are large. It follows that a canonical MTSM offers no new insights into economic questions regarding the historical distribution of the macro risk factors and yields, over and above what is learned from a factor-VAR. These results are rotation-invariant and, therefore, apply to many of the specifications in the literature. Keywords: Macro-finance term structure model; Filtering; No-arbitrage model; Factor model (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:109:y:2013:i:3:p:604-622 DOI: 10.1016/j.jfineco.2013.04.004 Access Statistics for this article Journal of Financial Economics is currently edited by G. William Schwert More articles in Journal of Financial Economics from Elsevier |
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