Estimating Impact of Age Distribution on Bond Pricing: A Semiparametric Functional Data Analysis Approach

Zongwu Cai, Jiazi Chen and Linlin Liu
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Zongwu Cai: Department of Economics, The University of Kansas, Lawrence, KS 66045, USA
Jiazi Chen: The Wang Yanan Institute for Studies in Economics, Xiamen University, Xiamen, Fujian 361005, China
Linlin Liu: The Wang Yanan Institute for Studies in Economics, Xiamen University, Xiamen, Fujian 361005, China and MOE Key Lab of Econometrics and School of Economics, Xiamen University, Xiamen, Fujian 361005, China

No 202102, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: This paper proposes a semiparametric functional data model to estimate the impact of demographic age distribution on interest rate term structure through an innovative functional affine term structure, which fully exploits the information efficiency in both structures. The framework consistently explains the age distribution impact on the persistence in yields via both channels of real rate and inflation, supporting the long run Fisher relationship and the life cycle hypothesis. Structural information in yields also helps to strongly identify the demographic impact function, which results in remarkable fit of the yield curve with counter-cyclical risk premia and more accurate out-of-sample forecast than alternative models.

Keywords: Demographic distribution; Life cycle; Term structure models; Semi-parametric model; Functional data analysis (search for similar items in EconPapers)
JEL-codes: E43 G12 J11 (search for similar items in EconPapers)
Date: 2021-01, Revised 2021-01
New Economics Papers: this item is included in nep-age and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:kan:wpaper:202102

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