Abstract
We develop an almost affine term-structure model with a closed-form solution for factor loadings in which the spot rate and the risk price are fractionally integrated processes with different integration orders. This model is used to explain two stylized facts. First, predictability of longterm excess bond returns requires sufficient volatility and persistence in the risk price. Second, the large volatility of long-term bond returns requires persistence in the spot rate. Decomposing long-term bond returns, we find that the expectations component from the level factor is more volatile than returns themselves and that the risk premium correlates negatively with level-factor innovations.
Original language | English |
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Pages (from-to) | 884-895 |
Number of pages | 12 |
Journal | Review of Economics and Statistics |
Volume | 99 |
Issue number | 5 |
DOIs | |
Publication status | Published - Dec 2017 |
Keywords
- UNCERTAINTY EMPIRICAL-EVIDENCE
- INTERNATIONAL PANEL DATASET
- LOCAL WHITTLE ESTIMATION
- STRUCTURE MODELS
- INTEREST-RATES
- INFLATION UNCERTAINTY
- EXPECTATIONS HYPOTHESIS
- FRACTIONAL-INTEGRATION
- AFFINE MODELS
- CROSS-SECTION
Datasets
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Replication data for: "The Volatility of Long-Term Bond Returns: Persistent Interest Rate Shocks and Time-Varying Risk Premiums"
Osterrieder, D. (Contributor) & Schotman, P. (Creator), Harvard Dataverse, 20 Jun 2016
DOI: 10.7910/dvn/s2hwcs, https://doi.org/10.7910%2Fdvn%2Fs2hwcs
Dataset/Software: Dataset