Taking the Cochrane-Piazzesi Term Structure Model Out of Sample: More Data, Additional Currencies, and FX Implications
Robert Hodrick () and
Critical Finance Review, 2021, vol. 10, issue 1, 83-123
We examine the statistical term structure model of cochrane and Piazzesi (2005) and its affine counterpart, developed in cochrane and Piazzesi (2008) in several out-of-sample analyzes. The modelâ€™s one-factor forecasting structure characterizes the term structures of additional currencies in samples ending in 2003. In post-2003 data one-factor structures again characterize each currencyâ€™s term structure, but we reject equality of the coefficients across the two samples. We derive some implications of the affine model for the predictability of cross-currency investments, but we find little support for these predictions in either pre-2004 or post-2003 data. The modelsâ€™ forecasts fail to beat historical average return forecasts of excess rates of return for bonds and currencies in recursive out-of-sample analyses.
Keywords: Affine term structure models; Bond and foreign currency risk premiums; Out-of-sample forecasting (search for similar items in EconPapers)
JEL-codes: G12 G15 (search for similar items in EconPapers)
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Working Paper: Taking the Cochrane-Piazzesi Term Structure Model Out of Sample: More Data, Additional Currencies, and FX Implications (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000107
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