Correcting Estimation Bias in Dynamic Term Structure Models

Michael Bauer, Glenn Rudebusch and Jing Cynthia Wu

Journal of Business & Economic Statistics, 2012, vol. 30, issue 3, 454-467

Abstract: The affine dynamic term structure model (DTSM) is the canonical empirical finance representation of the yield curve. However, the possibility that DTSM estimates may be distorted by small-sample bias has been largely ignored. We show that conventional estimates of DTSM coefficients are indeed severely biased, and this bias results in misleading estimates of expected future short-term interest rates and of long-maturity term premia. We provide a variety of bias-corrected estimates of affine DTSMs, for both maximally flexible and overidentified specifications. Our estimates imply interest rate expectations and term premia that are more plausible from a macrofinance perspective. This article has supplementary material online.

Date: 2012
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Citations: View citations in EconPapers (166)

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Persistent link: https://EconPapers.repec.org/RePEc:taf:jnlbes:v:30:y:2012:i:3:p:454-467

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DOI: 10.1080/07350015.2012.693855

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