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Expectation puzzles, time-varying risk premia, and affine models of the term structure (2002)
| Venue: | Journal of Financial Economics |
| Citations: | 148 - 18 self |
BibTeX
@ARTICLE{Dai02expectationpuzzles,,
author = {Qiang Dai and Kenneth J. Singleton},
title = {Expectation puzzles, time-varying risk premia, and affine models of the term structure},
journal = {Journal of Financial Economics},
year = {2002}
}
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Abstract
Though linear projections of returns on the slope of the yield curve have contradicted the implications of the traditional “expectations theory, ” we show that these findings are not puzzling relative to a large class of richer dynamic term structure models. Specifically, we are able to match all of the key empirical findings reported by Fama and Bliss and Campbell and Shiller, among others, within large subclasses of affine and quadratic-Gaussian term structure models. Additionally, we show that certain “risk-premium adjusted ” projections of changes in yields on the slope of the yield curve recover the coefficients of unity predicted by the models. Key to this matching are parameterizations of the market prices of risk that let the risk factors affect the market prices of risk directly, and not only through the factor volatilities. The risk premiums have a simple form consistent with Fama’s findings on the predictability of forward rates, and are also shown to be consistent with interest rate, feedback rules used by a monetary authority in setting monetary policy.
Keyphrases
term structure expectation puzzle time-varying risk premia affine model yield curve market price key empirical finding feedback rule large subclass large class risk factor risk premium forward rate quadratic-gaussian term structure model dynamic term structure model interest rate factor volatility simple form monetary authority traditional expectation theory linear projection monetary policy certain risk-premium
