Journal of Financial Economics Vol. 79 No. 3 2006
Term structure estimation without using latent factors
Abstract
A combination of observed and unobserved (latent) factors capture term structure dynamics. Information about these dynamics is extracted from observed factors using restrictions implied by no-arbitrage, without specifying or estimating any of the parameters associated with latent factors. Estimation is equivalent to fitting the moment conditions of a set of regressions, where no-arbitrage imposes cross-equation restrictions on the coefficients. The methodology is applied to the dynamics of inflation and yields. Outside of the disinflationary period of 1979 through 1983, short-term rates move one-for-one with expected inflation, while bond risk premia are insensitive to inflation.
- DOI
- 10.1016/j.jfineco.2005.03.007
- Volume
- 79
- Issue
- 3
- Pages
- 507-536
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref