Macroeconomic Variables, Euler Equation and Future Returns on Treasury Bonds: (Semi)Nonparametric Investigation

46 Pages Posted: 10 Apr 2008 Last revised: 20 Sep 2010

See all articles by Ai-ru Meg Cheng

Ai-ru Meg Cheng

University of California, Santa Cruz - Department of Economics

Yuriy Kitsul

Board of Governors of the Federal Reserve System

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

Cheng, Ai-Ru and Kitsul, Yuriy, Macroeconomic Variables, Euler Equation and Future Returns on Treasury Bonds: (Semi)Nonparametric Investigation (September 14, 2010). Available at SSRN: https://ssrn.com/abstract=1094042 or http://dx.doi.org/10.2139/ssrn.1094042

Ai-Ru Cheng (Contact Author)

University of California, Santa Cruz - Department of Economics ( email )

1156 High street
University of California
Santa Cruz, CA 95064
United States

HOME PAGE: http://people.ucsc.edu/~archeng

Yuriy Kitsul

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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