Term Structure Estimation with Survey Data on Interest Rate Forecasts
45 Pages Posted: 5 Jan 2006
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Term Structure Estimation with Survey Data on Interest Rate Forecasts
Term Structure Estimation with Survey Data on Interest Rate Forecasts
Date Written: November 2005
Abstract
The estimation of dynamic no-arbitrage term structure models with a flexible specification of the market price of risk is beset by a severe small-sample problem arising from the highly persistent nature of interest rates. We propose using survey forecasts of a short-term interest rate as an additional input to the estimation to overcome the problem. The three-factor pure-Gaussian model thus estimated with the U.S. Treasury term structure for the 1990-2003 period generates a stable estimate of the expected path of the short rate, reproduces the well-known stylized patterns in the expectations hypothesis tests, and captures some of the short-run variations in the survey forecast of the changes in longer-term interest rates.
Keywords: Dynamic term structure models, survey data, interest rate forecasts, term premia, expectations hypothesis
JEL Classification: E43, E47, G12
Suggested Citation: Suggested Citation
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