Analyzing interest rate risk : stochastic volatility in the term structure of government bond yields

We propose a Nelson-Siegel type interest rate term structure model where the underlying yield factors follow autoregressive processes with stochastic volatility. The factor volatilities parsimoniously capture risk inhere
We propose a Nelson-Siegel type interest rate term structure model where the underlying yield factors follow autoregressive processes with stochastic volatility. The factor volatilities parsimoniously capture risk inherent to the term structure and are associated with the time-varying uncertainty of the yield curve’s level, slope and curvature. Estimating the model based on U.S. government bond yields applying Markov chain Monte Carlo techniques we find that the factor volatilities follow highly persistent processes. We show that slope and curvature risk have explanatory power for bond excess returns and illustrate that the yield and volatility factors are closely related to industrial capacity utilization, inflation, monetary policy and employment growth. JEL Classification: C5, E4, G1
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Metadaten
Author:Nikolaus Hautsch, Yangguoyi Ou
URN:urn:nbn:de:hebis:30-63749
Series (Serial Number):CFS working paper series (2009, 03)
Document Type:Working Paper
Language:English
Date of Publication (online):2009/04/16
Year of first Publication:2009
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2009/04/16
Tag:Factor Models ; Macroeconomic Fundamentals; Stochastic Volatility ; Term Structure Modelling ; Yield Curve Risk
HeBIS PPN:211593699
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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