Canonical Term-Structure Models with Observable Factors and the Dynamics of Bond Risk Premia

Marcello Pericoli and Marco Taboga

Journal of Money, Credit and Banking, 2008, vol. 40, issue 7, 1471-1488

Abstract: We derive a canonical representation for the no-arbitrage discrete-time term structure models with both observable and unobservable state variables, popularized by Ang and Piazzesi (2003). We conduct a specification analysis based on this canonical representation and we analyze how alternative parameterizations affect estimated risk premia, impulse response functions, and variance decompositions. We find a trade-off between the need to obtain parsimonious parameterizations and the ability of the models to match observed patterns of variation in risk premia. We also find that more richly parameterized models uncover a greater influence of macroeconomic fundamentals on the long-end of the yield curve. Copyright (c) 2008 The Ohio State University.

Date: 2008
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Working Paper: Canonical term-structure models with observable factors and the dynamics of bond risk premiums (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:40:y:2008:i:7:p:1471-1488

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