DP5341 Term Structure Estimation with Survey Data on Interest Rate Forecasts
|Author(s):||Don H. Kim, Athanasios Orphanides|
|Publication Date:||November 2005|
|Keyword(s):||Dynamic term structure models, expectations hypothesis, interest rate forecasts, survey data, term premia|
|JEL(s):||E43, E47, G12|
|Programme Areas:||International Macroeconomics, Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=5341|
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.