In any canonical Gaussian dynamic term structure model (GDTSM), the conditional forecasts of the pricing factors are invariant to the imposition of no-arbitrage restrictions. This invariance is maintained even in the presence of a variety of restrictions on the factor structure of bond yields. To establish these results, we develop a novel canonical GDTSM in which the pricing factors are observable portfolios of yields. For our normalization, standard maximum likelihood algorithms converge to the global optimum almost instantaneously. We present empirical estimates and out-of-sample forecasts for several GDTSMs using data on U.S. Treasury bond yields. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

ABSTRACT We find that several recently proposed consumption‐based models of stock returns, when evaluated using an optimal set of managed portfolios and the associated model‐implied conditional moment restrictions, fail to capture key features of risk premiums in equity markets. To arrive at these conclusions, we construct an optimal Generalized Method of Moments (GMM) estimator for models in which the stochastic discount factor (SDF) is a conditionally affine function of a set of priced risk factors, and we show that there is an optimal choice of managed portfolios to use in testing a null model against a proposed alternative generalized SDF.

ABSTRACT This paper explores the nature of default arrival and recovery implicit in the term structures of sovereign CDS spreads. We argue that term structures of spreads reveal not only the arrival rates of credit events , but also the loss rates given credit events. Applying our framework to Mexico, Turkey, and Korea, we show that a single‐factor model with following a lognormal process captures most of the variation in the term structures of spreads. The risk premiums associated with unpredictable variation in are found to be economically significant and co‐vary importantly with several economic measures of global event risk, financial market volatility, and macroeconomic policy.

This paper explores the structural differences and relative goodness‐of‐fits of affine term structure models (ATSMs). Within the family of ATSMs there is a trade‐off between flexibility in modeling the conditional correlations and volatilities of the risk factors. This trade‐off is formalized by our classification of N ‐factor affine family into non‐nested subfamilies of models. Specializing to three‐factor ATSMs, our analysis suggests, based on theoretical considerations and empirical evidence, that some subfamilies of ATSMs are better suited than others to explaining historical interest rate behavior.

This paper develops a multi-factor econometric model of the term structure of interest-rate swap yields. The model accommodates the possibility of counterparty default and any differences in the liquidities of the Treasury and Swap markets. By parameterizing a model of swap rates directly, we are able to compute model-based estimates of the defaultable zero coupon bond rates implicit in the swap market without having to specify a priori the dependence of these rates on default hazard or recovery rates. The time series analysis of spreads between zero-coupon swap and treasury yields reveals that both credit and liquidity factors were important sources of variation in swap spreads over the past decade.

ABSTRACT This article develops a multi‐factor econometric model of the term structure of interest‐rate swap yields. The model accommodates the possibility of counterparty default, and any differences in the liquidities of the Treasury and Swap markets. By parameterizing a model of swap rates directly, we are able to compute model‐based estimates of the defaultable zero‐coupon bond rates implicit in the swap market without having to specify a priori the dependence of these rates on default hazard or recovery rates. The time series analysis of spreads between zero‐coupon swap and treasury yields reveals that both credit and liquidity factors were important sources of variation in swap spreads over the past decade.

In 2002, the editors of the RFS, JF, and JFE simultaneously published an editorial that urged authors to make good use of the advice and input provided by referees.1 Recent informal communications have suggested to us that it is time to renew that advice. Many papers are submitted to our journals, and the scarcest resource we have as a profession is the supply of time donated by referees to read, consider, and comment on their colleagues' work. In general, the author does not know the identity of the referee, so referees can express honest opinions about the quality of the work without alienating the author. However, this system has the counterproductive consequence that authors can undervalue the services they receive.We are particularly troubled by two practices that we see too frequently. First, some authors submit papers to journals at a relatively early stage of production in the hope that “the referee will help me figure out how to revise it to make it publishable.” This strategy imposes substantial costs on both sides. It burdens the referees with responsibilities that are not theirs. For the submitter, it raises the probability that the referee and editor will reject the paper as being too distant from acceptability. By submitting a paper that is unpolished, an author can cut off a potentially valuable publication outlet.

This paper studies the time-series behavior of asset returns and aggregate consumption. Using a representative consumer model and imposing restrictions on preferences and the joint distribution of consumption and returns, we deduce a restricted log-linear time-series representation. Preference parameters for the representative agent are estimated and the implied restrictions are tested using postwar data.