No-Arbitrage Near-Cointegrated Var(p) Term Structure Models, Term Premia and GDP Growth

Abstract

The recent macro-finance yield curve literature does not agree neither about term premia empirical properties nor about the importance or even the direction of its relationship with future economic activity. This paper proposes a two-step approach to handle both problems. First, in a VAR setting, we extract a reliable measure of the term premia by means of averaging estimators techniques aiming at optimally solving prediction problems when highly persistence processes are present and, thus, providing a so called Near-Cointegrated VAR(p) approach. Second, we analyze the dynamic response of the GDP to shocks on the term premia by using the New Information Response Function concept. First,we find that the NCVAR-based term premium measure is rather stable and contra-cyclical, with the expectation part accounting for most of the yield variability, which is consistent with the typical macroeconomic view. Second, we find that an increase of the long-term spread caused by a rise of a term premium induces two effects on future economic activity: the impact is negative for short horizons (less than one year), whereas it is positive for longer ones. Therefore, this result suggests that the above mentioned ambiguity could come from the fact that the sign of this relationship is changing over the period that follows the shock.

Keywords: Averaging Estimators, Persistence Problem, Near-Cointegration Analysis, No-Arbitrage Affine Term Structure Model, Term Premia, GDP Growth, New Information Response Functions

JEL Classification: C51, E43, E44, E47, G12