A Unified HJM Approach to Non-Markov Gaussian Dynamic Term Structure Models: International Evidence

Posted: 2 Oct 2012 Last revised: 24 Feb 2019

See all articles by Haitao Li

Haitao Li

University of Michigan - Stephen M. Ross School of Business; Cheung Kong Graduate School of Business; Cheung Kong Graduate School of Business

Xiaoxia Ye

University of Liverpool Management School

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance

Date Written: July 28, 2016

Abstract

Motivated by an extensive literature showing that government bond yields exhibit a strong non-Markov property, in the sense that moving averages of long-lagged yields significantly improve the predictability of excess bond returns. We then develop a systematic approach of constructing non-Markov Gaussian dynamic term structure models (GDTSMs) under the Heath-Jarrow-Morton (HJM) framework. Compared to the current literature, our approach is more flexible and parsimonious, enabling us to estimate an economically significant non-Markov effect that helps predict excess bond returns both in-sample and out-of-sample.

Keywords: Non-Markov; Gaussian Dynamic Term Structure Models; Excess Returns; International Bond Markets; Moving Averages; Forecasting

JEL Classification: C61, E43, E44, G12

Suggested Citation

Li, Haitao and Ye, Xiaoxia and Yu, Fan, A Unified HJM Approach to Non-Markov Gaussian Dynamic Term Structure Models: International Evidence (July 28, 2016). Available at SSRN: https://ssrn.com/abstract=2155538 or http://dx.doi.org/10.2139/ssrn.2155538

Haitao Li

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-615-5475 (Phone)

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Xiaoxia Ye (Contact Author)

University of Liverpool Management School ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
(909)607-3345 (Phone)

HOME PAGE: http://www.cmc.edu/academic/faculty/profile.asp?Fac=553

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