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Efficient bond price approximations in non-linear equilibrium-based term structure models

Efficient bond price approximations in non-linear equilibrium-based term structure models Abstract This paper develops an efficient method to compute higher-order perturbation approximations of bond prices. At third order, our approach can significantly shorten the approximation process and its precision exceeds the log-normal method and a procedure using consol bonds. The efficiency gains greatly facilitate any estimation which is illustrated by considering a long-run risk model for the US. Allowing for an unconstrained intertemporal elasticity of substitution enhances the model’s fit, and we see further improvements when incorporating stochastic volatility and external habits. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Studies in Nonlinear Dynamics & Econometrics de Gruyter

Efficient bond price approximations in non-linear equilibrium-based term structure models

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Publisher
de Gruyter
Copyright
Copyright © 2015 by the
ISSN
1081-1826
eISSN
1558-3708
DOI
10.1515/snde-2012-0005
Publisher site
See Article on Publisher Site

Abstract

Abstract This paper develops an efficient method to compute higher-order perturbation approximations of bond prices. At third order, our approach can significantly shorten the approximation process and its precision exceeds the log-normal method and a procedure using consol bonds. The efficiency gains greatly facilitate any estimation which is illustrated by considering a long-run risk model for the US. Allowing for an unconstrained intertemporal elasticity of substitution enhances the model’s fit, and we see further improvements when incorporating stochastic volatility and external habits.

Journal

Studies in Nonlinear Dynamics & Econometricsde Gruyter

Published: Feb 1, 2015

References