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Expectations, risk premia and information spanning in dynamic term structure model estimation

Author

Listed:
  • Guimarães, Rodrigo

    (Bank of England)

Abstract
This article examines the nature of the empirical instability in dynamic term structure models. I show that using survey forecasts is an effective solution because it directly addresses the information imbalance at the heart of the instability: it increases the (cross-section) information on actual dynamics, bridging the gap with the large (cross-section) information on the risk-adjusted dynamics. I relate this to other information spanning problems, particularly spanning of macro factors, and discuss the desirability of anchoring models to surveys. I also show that restricting prices of risk is not effective in ensuring stable and sensible implied expectations.

Suggested Citation

  • Guimarães, Rodrigo, 2014. "Expectations, risk premia and information spanning in dynamic term structure model estimation," Bank of England working papers 489, Bank of England.
    • Handle: RePEc:boe:boeewp:0489
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    References listed on IDEAS

    as
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    Cited by:

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    2. Kaminska, Iryna & Liu, Zhuoshi & Relleen, Jon & Vangelista, Elisabetta, 2018. "What do the prices of UK inflation-linked securities say on inflation expectations, risk premia and liquidity risks?," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 76-96.
    3. Elliott, David & Noss, Joseph, 2015. "Estimating market expectations of changes in Bank Rate," Bank of England Quarterly Bulletin, Bank of England, vol. 55(3), pages 273-282.

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    More about this item

    Keywords

    Interest rates; expectations; risk premium; dynamic term structure; robust; estimation;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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