A Unified HJM Approach to Non-Markov Gaussian Dynamic Term Structure Models: International Evidence
Posted: 2 Oct 2012 Last revised: 24 Feb 2019
Date Written: July 28, 2016
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: Suggested Citation