An Equilibrium Model of Nominal Bond Prices with Inflation-Output Correlation and Stochastic Volatility

Jacob Boudoukh

Journal of Money, Credit and Banking, 1993, vol. 25, issue 3, 636-65

Abstract: A vector autoregressive (VAR) model is used to describe the joint dynamics of consumption growth and inflation. The commonly used homoscedastic VAR is extended to allow for stochastic volatility, driven by an unobservable autoregressive factor. Bond prices, the conditional expectation of a function of these factors, are approximated using Tauchen's quadrature method. We show that the mean, variance, and autocorrelation of yields is captured relatively well by the VAR-SV model, calibrated with inflation and consumption data. The co-dependents of consumption and inflation are shown to be important determinants for both real and nominal rates. Time variations in inflation volatility generate realistic variability of risk premia, but unrealistically low average magnitudes. Copyright 1993 by Ohio State University Press.

Date: 1993
References: Add references at CitEc
Citations: View citations in EconPapers (33)

Downloads: (external link)
http://links.jstor.org/sici?sici=0022-2879%2819930 ... 0.CO%3B2-3&origin=bc full text (application/pdf)
Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:25:y:1993:i:3:p:636-65

Access Statistics for this article

Journal of Money, Credit and Banking is currently edited by Robert deYoung, Paul Evans, Pok-Sang Lam and Kenneth D. West

More articles in Journal of Money, Credit and Banking from Blackwell Publishing
Bibliographic data for series maintained by Wiley-Blackwell Digital Licensing () and Christopher F. Baum ().