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Discussion Paper Details

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Title: Term Structure Estimation with Survey Data on Interest Rate Forecasts

Author(s): Don H. Kim and Athanasios Orphanides

Publication Date: November 2005

Keyword(s): Dynamic term structure models, expectations hypothesis, interest rate forecasts, survey data and term premia

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: The estimation of dynamic no-arbitrage term structure models with a flexible specification of the market price of risk is beset by a severe small-sample problem arising from the highly persistent nature of interest rates. We propose using survey forecasts of a short-term interest rate as an additional input to the estimation to overcome the problem. The three-factor pure-Gaussian model thus estimated with the U.S. Treasury term structure for the 1990-2003 period generates a stable estimate of the expected path of the short rate, reproduces the well-known stylized patterns in the expectations hypothesis tests, and captures some of the short-run variations in the survey forecast of the changes in longer-term interest rates.

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Bibliographic Reference

Kim, D and Orphanides, A. 2005. 'Term Structure Estimation with Survey Data on Interest Rate Forecasts'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5341