This paper provides an overview of the analysis of the term structure of interest rates with a special emphasis on recent developments at the intersection of macroeconomics and finance. The topic is important to investors and also to policymakers, who wish to extract macroeconomic expectations from longer-term interest rates, and take actions to influence those rates. The simplest model of the term structure is the expectations hypothesis, which posits that long-term interest rates are expectations of future average short-term rates. In this paper, we show that many features of the con…guration of interest rates are puzzling from the perspective of the expectations hypothesis. We review models that explain these anomalies using time-varying risk premia. Although the quest for the fundamental macroeconomic explanations of these risk premia is ongoing, in‡ation uncertainty seems to play a large role. Finally, while modern finance theory prices bonds and other assets in a single unified framework, we also consider an earlier approach based on segmented markets. Market segmentation seems important to understand the term structure of interest rates during the recent financial crisis.

In this selective review, we …rst provide some empirical examples that motivate the usefulness of semi-nonparametric techniques in modelling economic and …nancial time series. We describe popular classes of semi-nonparametric dynamic models and some temporal dependence properties. We then present penalized sieve extremum (PSE) estimation as a general method for semi-nonparametric models with cross-sectional, panel, time series, or spatial data. The method is especially powerful in estimating di ¢ cult ill-posed inverse problems such as semi-nonparametric mixtures or conditional moment restrictions. We review recent advances on inference and large sample properties of the PSE estimators, which include (1) consistency and convergence rates of the PSE estimator of the nonparametric part; (2) limiting distributions of plug-in PSE estimators of functionals that are either smooth (i.e., root-n estimable) or non-smooth (i.e., slower than root-n estimable); (3) simple criterion-based inference for plug-in PSE estimation of smooth or non-smooth functionals; and (4) root-n asymptotic normality of semiparametric two-step estimators and their consistent variance estimators. Examples from dynamic asset pricing, nonlinear spatial VAR, semiparametric GARCH,

Abstract not found

Abstract not found