Term Structure Estimation with Survey Data on Interest Rate Forecasts

45 Pages Posted: 5 Jan 2006

See all articles by Don H. Kim

Don H. Kim

Board of Governors of the Federal Reserve System

Athanasios Orphanides

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Asia School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: November 2005

Abstract

The estimation of dynamic no-arbitrage term structure models with a flexible specification of the market price of risk is beset by a severe small-sample problem arising from the highly persistent nature of interest rates. We propose using survey forecasts of a short-term interest rate as an additional input to the estimation to overcome the problem. The three-factor pure-Gaussian model thus estimated with the U.S. Treasury term structure for the 1990-2003 period generates a stable estimate of the expected path of the short rate, reproduces the well-known stylized patterns in the expectations hypothesis tests, and captures some of the short-run variations in the survey forecast of the changes in longer-term interest rates.

Keywords: Dynamic term structure models, survey data, interest rate forecasts, term premia, expectations hypothesis

JEL Classification: E43, E47, G12

Suggested Citation

Kim, Don H. and Orphanides, Athanasios, Term Structure Estimation with Survey Data on Interest Rate Forecasts (November 2005). CEPR Discussion Paper No. 5341, Available at SSRN: https://ssrn.com/abstract=873886

Don H. Kim (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Athanasios Orphanides

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=54058

Asia School of Business ( email )

Jalan Kuching, Kuala Lumpur, Wilayah Persekutuan K
Kuala Lumpur, MA
Malaysia

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