Pricing the Term Structure with Linear Regressions

68 Pages Posted: 22 Mar 2009 Last revised: 7 May 2013

See all articles by Tobias Adrian

Tobias Adrian

International Monetary Fund

Richard K. Crump

Federal Reserve Banks - Federal Reserve Bank of New York

Emanuel Moench

Deutsche Bundesbank; Goethe University Frankfurt - Department of Money and Macroeconomics

Date Written: April 11, 2013

Abstract

We show how to price the time series and cross-section of the term structure of interest rates using a three-step linear regression approach. Our method allows computationally fast estimation of term structure models with a large number of pricing factors. We present specification tests favoring a model using five principal components of yields as factors. We demonstrate that this model outperforms the Cochrane and Piazzesi (2008) four-factor specification in out-of-sample exercises but generates similar in-sample term premium dynamics. Our regression approach can also incorporate unspanned factors and allows estimation of term structure models without observing a zero-coupon yield curve.

Keywords: term structure of interest rates, Fama-MacBeth regressions, dynamic asset pricing model estimation

JEL Classification: G10, G12, E43

Suggested Citation

Adrian, Tobias and Crump, Richard K. and Moench, Emanuel, Pricing the Term Structure with Linear Regressions (April 11, 2013). FRB of New York Staff Report No. 340, Available at SSRN: https://ssrn.com/abstract=1362586 or http://dx.doi.org/10.2139/ssrn.1362586

Tobias Adrian

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://www.tobiasadrian.com

Richard K. Crump

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Emanuel Moench (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
+49 69 95662312 (Phone)

HOME PAGE: http://https://www.bundesbank.de/en/emanuel-moench

Goethe University Frankfurt - Department of Money and Macroeconomics ( email )

Germany

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