Macroeconomic Sources of Risk in the Term Structure

Michael Wickens and Hiona Balfoussia

CEIS Research Paper from Tor Vergata University, CEIS

Abstract: n this paper we develop a new way of modelling time variation in term premia. This is based on the stochastic discount factor model of asset pricing with observable macroeconomic factors. The joint distribution of excess holding period US bond returns of different maturity and the fundamental macroeconomic factors is modelled using multivariate GARCH with conditional covariances in the mean to capture the term premia. We show how by testing the assumption of no arbitrage we can derive a specification test of our model. We estimate the contribution made to the term premia at different maturities by real and nominal macroeconomic sources of risk. From the estimated term premia we recover the term structure of interest rates and examine how it varies through time. Finally, we examine whether the large number of reported failures of the rational expectations hypothesis of the term structure can be attributed to an omitted time-varying term premium.

Keywords: term structure; the stochastic discount factor model; term premia; GARCH (search for similar items in EconPapers)
JEL-codes: C5 E4 G1 (search for similar items in EconPapers)
Pages: 49
Date: 2004-11-26
New Economics Papers: this item is included in nep-fin and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Macroeconomic Sources of Risk in the Term Structure (2007)
Journal Article: Macroeconomic Sources of Risk in the Term Structure (2007)
Working Paper: Macroeconomic Sources of Risk in the Term Structure (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:rtv:ceisrp:61

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