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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

Abstract: 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)
Date: 2013
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Working Paper: Pricing the term structure with linear regressions (2008) Downloads
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