No-Arbitrage Near-Cointegrated VAR(p) Term Structure Models, Term Premia and GDP Growth

35 Pages Posted: 10 Feb 2009 Last revised: 20 Jan 2011

See all articles by Caroline Jardet

Caroline Jardet

Banque de France

Alain Monfort

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); National Bureau of Economic Research (NBER); Maastricht University

Fulvio Pegoraro

Banque de France - Economics and Finance Research Center; CREST - Laboratoire de Finance et Assurance

Multiple version iconThere are 2 versions of this paper

Date Written: January 2011

Abstract

The recent macro-finance yield curve literature has focused on the extraction of a reliable measure of term premia (on long-term bonds) and on their relevant relationship with future economic activity (GDP), because of the practical implications of this relationship for the conduct of the monetary policy. However, the associated empirical findings do not agree neither about term premia empirical properties nor about the importance or even the direction of the above mentioned relationship.

The present paper proposes a two-step approach to handle both problems. First, in a VAR setting, we extract a reliable measure of the term premia by means of averaging estimators techniques aiming at optimally solving prediction problems when highly persistence processes are present and, thus, providing a so called Near-Cointegrated VAR(p) approach. Second, we analyze the dynamic response of the GDP to shocks on the term premia by using the New Information Response Function concept allowing, in particular, to deal with shocks on variables which are filters of the basic ones in the model. Results in both steps are quite different from those appearing in the literature because of a careful treatment of persistence, in the first step, and of the number of lags in the second one.

First, we find, coherently with the typical macroeconomic view, and in contrast with OLS-based VAR decompositions, that the NCVAR-based term premium measure is rather stable and contra-cyclical, with the expectation part accounting for most of the yield variability.

Second, we find that an increase of the long-term spread caused by a rise of a term premium induces two effects on future economic activity: the impact is negative for short horizons (less than one year), whereas it is positive for longer ones. Therefore, this result suggests that the above mentioned ambiguity could come from the fact that the sign of this relationship is changing over the period that follows the shock.

Keywords: Averaging Estimators, Persistence Problem, Near-Cointegration Analysis, No-Arbitrage Affine Term Structure Model, Term Premia, GDP Growth, New Information Response Functions

JEL Classification: C51, E43, E44, E47, G12

Suggested Citation

Jardet, Caroline and Monfort, Alain and Pegoraro, Fulvio, No-Arbitrage Near-Cointegrated VAR(p) Term Structure Models, Term Premia and GDP Growth (January 2011). EFA 2009 Bergen Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1340303 or http://dx.doi.org/10.2139/ssrn.1340303

Caroline Jardet

Banque de France ( email )

31 rue croix des petits champs
75049 Paris Cedex 01
France

Alain Monfort

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France
+33 1 4117 6079 (Phone)
+33 1 4117 6046 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Maastricht University

P.O. Box 616
Maastricht, 6200MD
Netherlands

Fulvio Pegoraro (Contact Author)

Banque de France - Economics and Finance Research Center ( email )

31 rue Croix des Petits Champs
75049 Paris Cedex 01 France
France
00.33.(0)1.42.92.91.67 (Phone)
00.33.(0)1.42.92.48.18 (Fax)

CREST - Laboratoire de Finance et Assurance ( email )

15, Boulevard Gabriel Péri
Bureau 1112 - Timbre J320
92245 Malafokk Cedex France, 92245
France
00.33.(0)1.41.17.77.97 (Phone)
00.33.(0)1.41.17.76.66 (Fax)

HOME PAGE: http://www.crest.fr/pageperso/pegoraro/pegoraro.htm

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