Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
960595 | Journal of Financial Economics | 2006 | 30 Pages |
Abstract
A combination of observed and unobserved (latent) factors capture term structure dynamics. Information about these dynamics is extracted from observed factors using restrictions implied by no-arbitrage, without specifying or estimating any of the parameters associated with latent factors. Estimation is equivalent to fitting the moment conditions of a set of regressions, where no-arbitrage imposes cross-equation restrictions on the coefficients. The methodology is applied to the dynamics of inflation and yields. Outside of the disinflationary period of 1979 through 1983, short-term rates move one-for-one with expected inflation, while bond risk premia are insensitive to inflation.
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Authors
Gregory R. Duffee,