Work

No-Arbitrage Priors, Drifting Volatilities, and the Term Structure of Interest Rates

Year: 2020

Type: article

Abstract: We use a Bayesian vector autoregression with stochastic volatility to forecast government bond yields. We form the conjugate prior from a no‐arbitrage affine term structure model. The model improves on the accuracy of point and density forecasts from a no‐change random walk and an affine term structure model with stochastic volatility. Our proposed approach may succeed by relaxing the no‐arbitrage affine term structure model's requirements that yields obey a factor structure and that the factors follow a Markov process. In the term structure model, its cross‐equation no‐arbitrage restrictions on the factor loadings appear to play a marginal role in forecasting gains.

Source: Journal of Applied Econometrics

DOI: 10.1002/jae.2828

Authors: Andrea Carriero, Todd E. Clark, Massimiliano Marcellino

Institutions: University of London, Queen Mary University of London, University of Bologna, Federal Reserve Bank of Cleveland, Bocconi University

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W3122519928

FWCI: 0.482

Cites: 70

Cited by: 16

Related to: 10