Abstract

http://ssrn.com/abstract=275437
 
 

References (46)



 
 

Citations (318)



 


 



A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables


Andrew Ang


Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Monika Piazzesi


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

July 2001

NBER Working Paper No. w8363

Abstract:     
This paper describes the joint dynamics of bond yields and macroeconomic variables in a Vector Autoregression, where identifying restrictions are based on the absence of arbitrage. Using a term structure model with inflation and economic growth factors, we investigate how macro variables affect bond prices and the dynamics of the yield curve. The setup accommodates higher order autoregressive lags for the macro factors. The macro variables are augmented by traditional unobserved term structure factors. We find that the forecasting performance of a VAR improves when no-arbitrage restrictions are imposed. Models that incorporate macro factors forecast better than traditional term structure models with only unobservable factors. Variance decompositions show that macro factors explain up to 85% of the variation in bond yields. Macro factors primarily explain movements at the short end and middle of the yield curve while unobservable factors still account for most of the movement at the long end of the yield curve.

Number of Pages in PDF File: 51

working papers series





Download This Paper

Date posted: June 28, 2001  

Suggested Citation

Ang, Andrew and Piazzesi, Monika, A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables (July 2001). NBER Working Paper No. w8363. Available at SSRN: http://ssrn.com/abstract=275437

Contact Information

Andrew Ang (Contact Author)
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Monika Piazzesi
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-3199 (Phone)
773-702-0458 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Feedback to SSRN


Paper statistics
Abstract Views: 1,622
Downloads: 151
Download Rank: 14,475
References:  46
Citations:  318

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo5 in 0.343 seconds