Taking the Cochrane-Piazzesi Term Structure Model Out of Sample: More Data, Additional Currencies, and FX Implications

45 Pages Posted: 1 Oct 2018

See all articles by Robert J. Hodrick

Robert J. Hodrick

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

Tuomas Tomunen

Columbia University - Columbia Business School

Date Written: September 2018

Abstract

We examine the Cochrane and Piazzesi (2005, 2008) model in several out-of-sample analyzes. The model's one-factor forecasting structure characterizes the term structures of additional currencies in samples ending in 2003. In post-2003 data one-factor structures again characterize each currency's term structure, but we reject equality of the coefficients across the two samples. We derive some implications of the model for the predictability of cross-currency investments, but we find little support for these predictions in either pre-2004 or post-2003 data. The model fails to beat historical average returns in recursive out-or-sample forecasting of excess rates of return for bonds and currencies.

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Suggested Citation

Hodrick, Robert J. and Tomunen, Tuomas, Taking the Cochrane-Piazzesi Term Structure Model Out of Sample: More Data, Additional Currencies, and FX Implications (September 2018). NBER Working Paper No. w25092. Available at SSRN: https://ssrn.com/abstract=3258189

Robert J. Hodrick (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
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National Bureau of Economic Research (NBER)

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Tuomas Tomunen

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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