The role of uncertainty in the term structure of interest rates: A GARCH-ATSM approach

Junko Koeda, Ryo Kato

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

This article examines the roles of uncertainties regarding various macro-variables in determining risk premiums of bond yields. We develop a multivariate GARCH-VAR to quantify uncertainties regarding inflation, real activities and monetary policy as time-varying conditional variances. We jointly estimate the multivariate GARCH and no-arbitrage bond pricing equations using a maximum likelihood method. The results indicate that the inflation uncertainty is the largest contributor to the dynamics of long-term yields since the 1980s, while the monetary policy uncertainty also plays noticeable roles.

Original languageEnglish
Pages (from-to)3710-3722
Number of pages13
JournalApplied Economics
Volume47
Issue number34-35
DOIs
Publication statusPublished - 2015 Jul 27

Keywords

  • GARCH
  • estimation
  • financial
  • term structure of interest rates

ASJC Scopus subject areas

  • Economics and Econometrics

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