Journal of Financial Economics Vol. 110 No. 1 2013
Pricing the term structure with linear regressions
Abstract
We show how to price the time series and cross section of the term structure of interest rates using a three-step linear regression approach. Our method allows computationally fast estimation of term structure models with a large number of pricing factors. We present specification tests favoring a model using five principal components of yields as factors. We demonstrate that this model outperforms the Cochrane and Piazzesi (2008) four-factor specification in out-of-sample exercises but generates similar in-sample term premium dynamics. Our regression approach can also incorporate unspanned factors and allows estimation of term structure models without observing a zero-coupon yield curve.
- DOI
- 10.1016/j.jfineco.2013.04.009
- Volume
- 110
- Issue
- 1
- Pages
- 110-138
- Language
- en
- Sources
- crossref bibtex:phds-export.bib openalex