Does the Macro Matter in Macro-Finance Term Structure Models?

39 Pages Posted: 2 Feb 2013

Date Written: February 1, 2013

Abstract

In a simple macro-finance term structure (MFTS) model with macroeconomic variables as risk factors, it matters little whether an econometrician has a strong prior on a particular macroeconomic model. I show in a Monte Carlo experiment that econometricians with drastically different priors will reach similar conclusions on 1) parameters of the price of risk, 2) time series properties of risk premia and price of risk, and 3) impulse responses of the price of risk to macroeconomic shocks. The results imply that the choice of a macroeconomic model is immaterial to MFTS models, and a reduced-form VAR with no prior will do just as well. Moreover, the results suggest that MFTS models are not affected much by structural changes in the macro-economy.

Keywords: macro-finance, term structure, VAR, Bayesian method

JEL Classification: E43, E44, G12

Suggested Citation

Tsang, Kwok Ping, Does the Macro Matter in Macro-Finance Term Structure Models? (February 1, 2013). Available at SSRN: https://ssrn.com/abstract=2210454 or http://dx.doi.org/10.2139/ssrn.2210454

Kwok Ping Tsang (Contact Author)

Virginia Tech ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States

HOME PAGE: http://https://sites.google.com/site/byrontkp/

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