Term Structure Modelling

Term Structure Modelling

Hosted by: Bank of Finland, Helsinki

27-29 August 2018

Professors Kenneth Singleton and Anh Le will teach the course. It is primarily aimed at participants in the Euro Area Business Cycle Network but applications will also be considered from doctoral students, post-doctoral researchers and economists working in central banks and government institutions outside of the network, as well as commercial organisations (fees applicable for non-network organisations).

Course Contents

This course covers select topics on the modelling of the term structure of interest rates, including reduced-form affine term structure models and equilibrium models of the interest rates in which agents are endowed with specific preferences. We discuss how to a) construct; b) implement; and c) use of models of the interest rates for analysing risk premiums and interpreted macroeconomic events. The tentative topics are as follows:


(i) review the salient empirical properties of bond yields (conditional moments, factor structure, etc.) and several of the empirical puzzles related to the distributions of bond yields; (ii) review no-arbitrage pricing of default-free bonds; and (iii) introduce parametric models for pricing bonds, including affine and linear-rational models.

Reduced-Form, Affine Term Structure Models.

(i) alternative normalizations for achieving identification; (ii) estimation strategies for dynamic term structure models; and (iii) goodness-of-fit of models of bond yields.

Equilibrium Models of the Term Structure.

(i) pricing bonds in models with long-run risks; (ii) habit formation and risk premiums in bond markets; and (iii) empirical challenges in matching distributions of yields in equilibrium models.

Spanning Restrictions in Dynamic Term Structure Models.

(i) Economic motivations for spanning restrictions; (ii) evidence of unspanned factors and their implications for modelling risk premiums in bond markets; and (iii) learning in bond markets. Time-Varying Volatility in Bond Markets (i) unspanned volatility in bond markets; (ii) potential resolutions of the tension between fitting conditional means and variances of yields; and (iii) using options data to infer volatilities in bond markets.