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

Junko Koeda, Ryo Kato

    Research output: Contribution to journalArticle

    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

    Fingerprint

    Term structure of interest rates
    Generalized autoregressive conditional heteroscedasticity
    Multivariate GARCH
    Uncertainty
    Monetary policy
    No-arbitrage
    Bond yields
    Conditional variance
    Time-varying
    Real activity
    Inflation
    Risk premium
    Bond pricing
    Policy uncertainty
    Inflation uncertainty
    Maximum likelihood

    Keywords

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

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    The role of uncertainty in the term structure of interest rates : A GARCH-ATSM approach. / Koeda, Junko; Kato, Ryo.

    In: Applied Economics, Vol. 47, No. 34-35, 27.07.2015, p. 3710-3722.

    Research output: Contribution to journalArticle

    Koeda, Junko ; Kato, Ryo. / The role of uncertainty in the term structure of interest rates : A GARCH-ATSM approach. In: Applied Economics. 2015 ; Vol. 47, No. 34-35. pp. 3710-3722.
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