Jakas, Vicente (2011): Theory and empirics of an affine term structure model applied to European data. Published in: Aestimatio. The IEB International Journal of Finance No. 2 (July 2011): pp. 118.

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Abstract
The basic asset pricing equation is adapted to include the effects of unemployment, consumers’ expectations, the price level and money supply on money market rates and government bond yields. Expected consumption growth is modelled using European unemployment figures and Eurostat Consumer Confidence Index. The price level is incorporated in the aggregate marginal utility function using production price index (PPI) as a proxy. An affine term structure model is derived using a state space system with an observation equation which links observable yields to these macroeconomic variables and a state equation which describes the dynamics of these variables. Unemployment and consumer confidence index will have a shift and a slope effect on the yield curve, for frontend yields moving faster than in the long end. Production price index exhibits a twist effect (flattening or steepening of the curve) which results in frontend yields shifting in opposite directions to the long end of the curve. This empirical work shows that yields are negatively correlated to money supply, as expected in classical ISLM models. And that money supply exhibits a slope effect, with the frontend of the curve shifting faster than the longer end.
Item Type:  MPRA Paper 

Original Title:  Theory and empirics of an affine term structure model applied to European data 
English Title:  Theory and empirics of an affine term structure Model Applied to European Data 
Language:  English 
Keywords:  Macroeconomic releases, Term structure of interest rates, Dynamic factors, Affine term structure models 
Subjects:  E  Macroeconomics and Monetary Economics > E4  Money and Interest Rates > E43  Interest Rates: Determination, Term Structure, and Effects E  Macroeconomics and Monetary Economics > E1  General Aggregative Models > E12  Keynes ; Keynesian ; PostKeynesian G  Financial Economics > G1  General Financial Markets > G12  Asset Pricing ; Trading Volume ; Bond Interest Rates E  Macroeconomics and Monetary Economics > E5  Monetary Policy, Central Banking, and the Supply of Money and Credit > E52  Monetary Policy E  Macroeconomics and Monetary Economics > E4  Money and Interest Rates > E44  Financial Markets and the Macroeconomy 
Item ID:  36029 
Depositing User:  IEB Research Department 
Date Deposited:  18 Jan 2012 16:55 
Last Modified:  30 Sep 2019 09:33 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/36029 