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Macroeconomic sources of risk in the term structure

Balfoussia, C. and Wickens, M. (2007) Macroeconomic sources of risk in the term structure. Journal of Money Credit and Banking, 39 (1). pp. 205-236. ISSN 0022-2879

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Abstract

We develop a new way of modeling time variation in term premia, based on the stochastic discount factor model of asset pricing. The joint distribution of excess U.S. bond returns of different maturity and the observable fundamental macroeconomic factors is modeled using multivariate GARCH with conditional covariances in the mean to capture the term premia. By testing the assumption of no arbitrage we derive a specification test of our model. We estimate the contribution made to the term premia at different maturities through real and nominal 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 reported failures of the rational expectations hypothesis can be attributed to an omitted time-varying term premium.

Item Type: Article
Institution: The University of York
Academic Units: The University of York > Economics and Related Studies (York)
Depositing User: York RAE Import
Date Deposited: 31 Jul 2009 13:35
Last Modified: 31 Jul 2009 13:35
Published Version: http://dx.doi.org/10.1111/j.0022-2879.2007.00009.x
Status: Published
Publisher: Blackwell Publishing Ltd
Identification Number: 10.1111/j.0022-2879.2007.00009.x
URI: http://eprints.whiterose.ac.uk/id/eprint/6771

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