This paper provides a simulated moments estimator (SME) of the parameters of dynamic models in which the state vector follows a time-homogeneous Markov process. Conditions are provided for both weak and strong consistency as well as asymptotic normality. Various tradeoff's among the regularity conditions underlying the large sample properties of the SME are discussed in the context of an asset pricing model.

ABSTRACT We study risk premiums in the U.S. Treasury bond market from the perspective of a Bayesian econometrician who learns in real time from disagreement among investors about future bond yields. Notably, disagreement has substantial predictive power for yields, and 's risk premiums are less volatile than those in the analogous model without learning. 's forecasts are substantially more accurate than the consensus forecasts of market professionals, particularly following U.S. recessions. The predictive power of disagreement is distinct from the (much weaker) one of inflation and output growth. Rather, it appears to reflect uncertainty about future fiscal policy.

Equilibrium, affine asset pricing models with Larry G. Epstein and Stanley E. Zin (1989)’s preferences typically generate time variation in risk premiums through time variation in the quantity of risks, with the market prices of risks (MPR) held constant. This is true of models with built in long-run consumption risks (LRR) (e.g., Ravi Bansal and Amir Yaron (2004), Bansal, Dana Kiku, and Yaron (2009)), as well as of the broader formulations in Bjorn Eraker and Ivan Shaliastovich (2008). For pricing bonds such formulations may be overly constrained as reduced form models suggest that it is time variation in the MPRs, more than stochastic yield volatilities, that resolve the expectations puzzles in bond markets. Constant MPRs are not an inherent feature of equilibrium pricing models with recursive preferences, but rather they arise as a consequence of the linearizations underlying the affine approximations to these models that have been explored empirically. The essential ingredients of these econometric formulations are (P1) recursive (Epstein-Zin) preferences, (P2) risk neutral (핈), affine pricing, and (P3) the assumption that the state of the economy is described by an affine process under the historical (핇) distribution. Key to achieving property (P2), given P1 and P3, is the assumption that the valuation ratio (the log “price/consumption” ratio) associated with the claim that pays aggregate consumption is an affine function of the state. We develop a dynamic term structure model with recursive preferences that preserves

[This paper describes a method for estimating and testing nonlinear rational expectations models directly from stochastic Euler equations. The estimation procedure makes sample counterparts to the population orthogonality conditions implied by the economic model close to zero. An attractive feature of this method is that the parameters of the dynamic objective functions of economic agents can be estimated without explicitly solving for the stochastic equilibrium.]

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.