No-Arbitrage VARMA Term Structure Models with Macroeconomic Variables

2009 ◽  
Author(s):  
Bruno Feunou
Keyword(s):  
Term Structure ◽  
No Arbitrage ◽  
Macroeconomic Variables ◽  
Term Structure Models

Nearly Exact Bayesian Estimation of Non-linear No-Arbitrage Term-Structure Models*

2021 ◽  
Author(s):  
Marcello Pericoli ◽  
Marco Taboga
Keyword(s):  
Bayesian Estimation ◽  
Term Structure ◽  
Broad Class ◽  
Model Parameters ◽  
State Variables ◽  
Computationally Efficient ◽  
Macroeconomic Factors ◽  
No Arbitrage ◽  
Term Structure Models ◽  
Non Linear

Abstract We propose a general method for the Bayesian estimation of a very broad class of non-linear no-arbitrage term-structure models. The main innovation we introduce is a computationally efficient method, based on deep learning techniques, for approximating no-arbitrage model-implied bond yields to any desired degree of accuracy. Once the pricing function is approximated, the posterior distribution of model parameters and unobservable state variables can be estimated by standard Markov Chain Monte Carlo methods. As an illustrative example, we apply the proposed techniques to the estimation of a shadow-rate model with a time-varying lower bound and unspanned macroeconomic factors.

Interest Rate Volatility and No-Arbitrage Affine Term Structure Models

2021 ◽  
Author(s):  
Scott Joslin ◽  
Anh Le
Keyword(s):  
Term Structure ◽  
Affine Term Structure ◽  
No Arbitrage ◽  
Affine Term Structure Models ◽  
Term Structure Models ◽  
Second Moments ◽  
Interest Rate Volatility ◽  
Rich Information ◽  
The Rich ◽  
Absence Of Arbitrage

Within the affine framework, many have observed a tension between matching conditional first and second moments in dynamic term structure models (DTSMs). Although the existence of this tension is generally accepted, less understood is the mechanism that underlies it. We show that no arbitrage along with the rich information in the cross section of yields has strong implications for both the dynamics of volatility and the forecasts of yields. We show that this link implied by the absence of arbitrage—and not the factor structure per se—underlies the tension between first and second moments found in the literature. Adding to recent research that has suggested that no-arbitrage restrictions are nearly irrelevant in Gaussian DTSMs, our results show that no-arbitrage restrictions are potentially relevant when there is stochastic volatility. This paper was accepted by Gustavo Manso, finance.

scholarly journals Tips from TIPS: The Informational Content of Treasury Inflation-Protected Security Prices

2018 ◽  
Vol 53 (1) ◽  
pp. 395-436 ◽  
Author(s):  
Stefania D’Amico ◽  
Don H. Kim ◽  
Min Wei
Keyword(s):  
Financial Crisis ◽  
Term Structure ◽  
Informational Content ◽  
Security Prices ◽  
2008 Financial Crisis ◽  
No Arbitrage ◽  
Treasury Securities ◽  
Term Structure Models ◽  
Expected Inflation

Treasury Inflation-Protected Securities (TIPS) are frequently thought of as risk-free real bonds. Using no-arbitrage term structure models, we show that TIPS yields exceeded risk-free real yields by as much as 100 basis points when TIPS were first issued and up to 300 basis points during the 2007–2008 financial crisis. This spread predominantly reflects the poorer liquidity of TIPS relative to nominal Treasury securities. Other factors, including the indexation lag and the embedded deflation protection in TIPS, play a much smaller role. Ignoring this spread also significantly distorts the informational content of TIPS break-even inflation, a widely used proxy for expected inflation.

scholarly journals No-arbitrage one-factor term structure models in zero- or negative-lower-bound environments

2020 ◽  
Vol 17 (1) ◽  
pp. 197-212
Author(s):  
Andrea Tarelli
Keyword(s):  
Interest Rate ◽  
Lower Bound ◽  
Term Structure ◽  
Yield Curve ◽  
Interest Rate Risk ◽  
Information Criteria ◽  
Time Varying ◽  
Term Structure Model ◽  
No Arbitrage ◽  
Term Structure Models

One-factor no-arbitrage term structure models where the instantaneous interest rate follows either the process proposed by Vasicek (1977) or by Cox, Ingersoll, and Ross (1985), commonly known as CIR, are parsimonious and analytically tractable. Models based on the original CIR process have the important characteristic of allowing for a time-varying conditional interest rate volatility but are undefined in negative interest rate environments. A Shifted-CIR no-arbitrage term structure model, where the instantaneous interest rate is given by the sum of a constant lower bound and a non-negative CIR-like process, allows for negative yields and benefits from similar tractability of the original CIR model. Based on the U.S. and German yield curve data, the Vasicek and Shifted-CIR specifications, both considering constant and time-varying risk premia, are compared in terms of information criteria and forecasting ability. Information criteria prefer the Shifted-CIR specification to models based on the Vasicek process. It also provides similar or better in-sample and out-of-sample forecasting ability of future yield curve movements. Introducing a time variation of the interest rate risk premium in no-arbitrage one-factor term structure models is instead not recommended, as it provides worse information criteria and forecasting performance.

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