Macroeconomic Variables, Euler Equation and Future Returns on Treasury Bonds: (Semi)Nonparametric Investigation
46 Pages Posted: 10 Apr 2008 Last revised: 20 Sep 2010
Date Written: September 14, 2010
Abstract
We find that the data on macroeconomic variables contain relevant information for explaining of future Treasury bond returns besides and beyond the information already contained in historic forward rates. In the forecasting exercise, we impose cross-sectional no-arbitrage-type restrictions on bond returns of multiple maturities and allow for flexible functional forms of dependence between the parameters of the pricing kernel and forecasting variables, by modeling these parameters as a (semi)nonparametric function of composite indexes (linear combinations) of the two sets of forecasting variables. Our GMM estimation procedure employs an innovative method for generating instrumental variables based on the kernel density of the underlying indexes.
Keywords: no-arbitrage, pricing kernel, semi-nonparametric. non-parametric, GMM
JEL Classification: C5, E4, G0
Suggested Citation: Suggested Citation
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