Discussion paper

DP5341 Term Structure Estimation with Survey Data on Interest Rate Forecasts

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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Citation

Orphanides, A and D Kim (2005), ‘DP5341 Term Structure Estimation with Survey Data on Interest Rate Forecasts‘, CEPR Discussion Paper No. 5341. CEPR Press, Paris & London. https://cepr.org/publications/dp5341