The role of uncertainty in the term structure of interest rates: A GARCH-ATSM approach

Junko Koeda and Ryo Kato

Applied Economics, 2015, vol. 47, issue 34-35, 3710-3722

Abstract: This article examines the roles of uncertainties regarding various macro-variables in determining risk premiums of bond yields. We develop a multivariate GARCH-VAR to quantify uncertainties regarding inflation, real activities and monetary policy as time-varying conditional variances. We jointly estimate the multivariate GARCH and no-arbitrage bond pricing equations using a maximum likelihood method. The results indicate that the inflation uncertainty is the largest contributor to the dynamics of long-term yields since the 1980s, while the monetary policy uncertainty also plays noticeable roles.

Date: 2015
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DOI: 10.1080/00036846.2015.1021454

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