No-Arbitrage Taylor Rules

56 Pages Posted: 21 Nov 2004

See all articles by Andrew Ang

Andrew Ang

BlackRock, Inc

Sen Dong

Columbia University - Columbia Business School, Economics

Monika Piazzesi

Stanford University; University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 15, 2004

Abstract

We estimate Taylor (1993) rules and identify monetary policy shocks using no-arbitrage pricing techniques. Long-term interest rates are risk-adjusted expected values of future short rates and thus provide strong over-identifying restrictions about the policy rule used by the Federal Reserve. We find that inflation and GDP growth account for over half of the timevariation of yield levels and we attribute almost all of the movements in the term spread to inflation. We find that Taylor rules estimated with no-arbitrage restrictions differ substantially from Taylor rules estimated by OLS and monetary policy shocks identified with no-arbitrage techniques are less volatile than their OLS counterparts. The no-arbitrage framework also accommodates backward-looking and forward-looking Taylor rules.

Keywords: Affine term structure model, monetary policy, interest rate risk

JEL Classification: C13, E43, E52, G12

Suggested Citation

Ang, Andrew and Dong, Sen and Piazzesi, Monika, No-Arbitrage Taylor Rules (November 15, 2004). Available at SSRN: https://ssrn.com/abstract=621126 or http://dx.doi.org/10.2139/ssrn.621126

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Sen Dong

Columbia University - Columbia Business School, Economics ( email )

420 West 118th Street
New York, NY 10027
United States

Monika Piazzesi

Stanford University ( email )

Stanford, CA 94305
United States

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States
773-834-3199 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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