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The Review of Asset Pricing Studies Vol. 11 No. 2 2021

Zero-Coupon Yields and the Cross-Section of Bond Prices

N. Aaron Pancost

McCombs School of Business, University of Texas at Austin ,

Abstract

I estimate a dynamic term structure model on an unbalanced panel of Treasury coupon bonds, without relying on an interpolated zero-coupon yield curve. A linearity-generating model, which separates the parameters that govern the cross-sectional and time-series moments of the model, takes about 8 min to estimate on a sample of over 1 million bond prices. The traditional exponential affine model takes about 2 hr, because of a convexity term in coupon-bond prices that cannot be concentrated out of the cross-sectional likelihood. I quantify the on-the-run premium and a “notes versus bonds” premium from 1990 to 2017 in a single, easy-to-estimate no-arbitrage model. (JEL G12, G14, C33) Received: April 30, 2018; editorial decision November 3, 2020 by Editor Nikolai Roussanov

DOI
10.1093/rapstu/raab002
Volume
11
Issue
2
Pages
209-268
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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