Gaussian macro-finance term structure models with lags

Scott Joslin, Anh Le, Kenneth J. Singleton

Research output: Contribution to journalArticlepeer-review

11 Scopus citations

Abstract

This article develops a new family of Gaussian macro-dynamic term structure models (MTSMs) in which bond yields follow a lowdimensional factor structure and the historical distribution of bond yields and macroeconomic variables is characterized by a vectorautoregression with order p>1. Most formulations of MTSMs with p>1 are shown to imply a much higher dimensional factor structure for yields than what is called for by historical data. In contrast, our "asymmetric" arbitrage-free MTSM gives modelers the flexibility to match historical lag distributions with p>1 while maintaining a parsimonious factor representation of yields. Using our canonical family of MTSMs we revisit: (i) the impact of no-arbitrage restrictions on the joint distribution of bond yields and macro risks, comparing models with and without the restriction that macro risks are spanned by yield-curve information; and (ii) the identification of the policy parameters in Taylor-style monetary policy rules within MTSMs with macro risk factors and lags.

Original languageEnglish (US)
Article numbernbt012
Pages (from-to)581-609
Number of pages29
JournalJournal of Financial Econometrics
Volume11
Issue number4
DOIs
StatePublished - Sep 2013

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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