An Equilibrium Model of the Term Structure of Interest Rates: Recursive Preferences at Play

Gonzalez-Astudillo, Manuel (2009): An Equilibrium Model of the Term Structure of Interest Rates: Recursive Preferences at Play.

Abstract

In this paper we analyze the performance of an equilibrium model of the term structure of the interest rate under Epstein-Zin/Weil preferences in which consumption growth and inflation follow a VAR process with logistic stochastic volatility. We find that the model can successfully reproduce the first moment of yields and their persistence, but fails to reproduce their standard deviation. The filtered stochastic volatility is a good indicator of crises and shows high persistence, but it is not enough to generate a slowly decaying volatility of yields with respect to maturity. Preference parameters are estimated to be about 4 for the coefficient of relative risk aversion and infinity for the elasticity of intertemporal substitution.

• Item Type: MPRA Paper
• Language: English
• Keywords: Yield curve; Recursive preferences; Logistic stochastic volatility; Nonlinear Kalman filter; Quadrature-based methods.
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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