Pricing the term structure with linear regressions
Tobias Adrian (),
Richard Crump () and
Emanuel Moench ()
Journal of Financial Economics, 2013, vol. 110, issue 1, 110-138
We show how to price the time series and cross section of the term structure of interest rates using a three-step linear regression approach. Our method allows computationally fast estimation of term structure models with a large number of pricing factors. We present specification tests favoring a model using five principal components of yields as factors. We demonstrate that this model outperforms the Cochrane and Piazzesi (2008) four-factor specification in out-of-sample exercises but generates similar in-sample term premium dynamics. Our regression approach can also incorporate unspanned factors and allows estimation of term structure models without observing a zero-coupon yield curve.
Keywords: Term structure of interest rates; Fama-MacBeth regressions; Dynamic asset pricing estimation; Empirical finance (search for similar items in EconPapers)
JEL-codes: G10 G12 (search for similar items in EconPapers)
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Working Paper: Pricing the term structure with linear regressions (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:110:y:2013:i:1:p:110-138
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