Expectation Puzzles, Time-varying Risk Premia, and Dynamic Models of the Term Structure / Qiang Dai, Kenneth J. Singleton.

Format:

Book

Author/Creator:

Dai, Qiang.

Contributor:

National Bureau of Economic Research.

Singleton, Kenneth J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8167.

NBER working paper series no. w8167

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2001.

Summary:

Though linear projections of returns on the slope of the yield curve have contradicted the implications of the traditional expectations theory,' we show that these findings are not puzzling relative to a large class of richer dynamic term structure models. Specifically, we are able to match all of the key empirical findings reported by Fama and Bliss and Campbell and Shiller, among others, within large subclasses of affine and quadratic-Gaussian term structure models. Additionally, we show that certain risk-premium adjusted' projections of changes in yields on the slope of the yield curve recover the coefficients of unity predicted by the models. Key to this matching are parameterizations of the market prices of risk that let the risk factors affect the market prices of risk directly, and not only through the factor volatilities. The risk premiums have a simple form consistent with Fama's findings on the predictability of forward rates, and are shown to also be consistent with interest rate, feedback rules used by a monetary authority in setting monetary policy.

Notes:

Print version record

March 2001.