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Term Structure Dynamics, Macro-Finance Factors and Model Uncertainty

Byrne, JP and Cao, S and Korobilis, D (2016) Term Structure Dynamics, Macro-Finance Factors and Model Uncertainty. Working Paper. Essex Finance Centre Working Papers.

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Abstract

This paper models and predicts the term structure of US interest rates in a data rich environment. We allow the model dimension and parameters to change over time, accounting for model uncertainty and sudden structural changes. The proposed time-varying parameter Nelson-Siegel Dynamic Model Averaging (DMA) predicts yields better than standard benchmarks. DMA performs better since it incorporates more macro-finance information during recessions. The proposed method allows us to estimate plausible real-time term premia, whose countercyclicality weakened during the financial crisis.

Item Type: Monograph (Working Paper)
Uncontrolled Keywords: Term Structure of Interest Rates; Nelson-Siegel; Dynamic Model Averaging; Bayesian Methods; Term Premia
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Jim Jamieson
Date Deposited: 22 Nov 2016 09:59
Last Modified: 07 Aug 2019 21:15
URI: http://repository.essex.ac.uk/id/eprint/18195

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