3 edition of **Arbitrage-free bond pricing with dynamic macroeconomic models** found in the catalog.

Arbitrage-free bond pricing with dynamic macroeconomic models

- 98 Want to read
- 19 Currently reading

Published
**2007**
by National Bureau of Economic Research in Cambridge, Mass
.

Written in English

- Interest rates,
- Inflation (Finance),
- Bonds -- Prices -- Econometric models,
- Monetary policy,
- Macroeconomics

We examine the relationship between monetary-policy-induced changes in short interest rates and yields on long-maturity default-free bonds. The volatility of the long end of the term structure and its relationship with monetary policy are puzzling from the perspective of simple structural macroeconomic models. We explore whether richer models of risk premiums, specifically stochastic volatility models combined with Epstein-Zin recursive utility, can account for such patterns. We study the properties of the yield curve when inflation is an exogenous process and compare this to the yield curve when inflation is endogenous and determined through an interest-rate/Taylor rule. When inflation is exogenous, it is difficult to match the shape of the historical average yield curve. Capturing its upward slope is especially difficult as the nominal pricing kernel with exogenous inflation does not exhibit any negative autocorrelation - a necessary condition for an upward sloping yield curve as shown in Backus and Zin (1994). Endogenizing inflation provides a substantially better fit of the historical yield curve as the Taylor rule provides additional flexibility in introducing negative autocorrelation into the nominal pricing kernel. Additionally, endogenous inflation provides for a flatter term structure of yield volatilities which better fits historical bond data.

**Edition Notes**

Statement | Michael F. Gallmeyer ... [et al.] |

Series | NBER working paper series -- no. 13245., Working paper series (National Bureau of Economic Research) -- working paper no. 13245. |

Contributions | Gallmeyer, Michael F., National Bureau of Economic Research. |

The Physical Object | |
---|---|

Pagination | 36 p. : |

Number of Pages | 36 |

ID Numbers | |

Open Library | OL17634556M |

OCLC/WorldCa | 159939228 |

A Comparison of Bond Pricing Models in the Pricing of Credit Risk. JEL C23; JEL C24; Counterparty Risk and the Pricing of Defaultable Securities; Fixed Income Pricing; Convertible Bonds with Market Risk and Credit Risk; Defaultable Term Structure Models with Fractional Recovery of Par; A Model of Corporate Bond Prices with Dynamic Capital Structure. This article discusses the evolution of dynamic macroeconomic models from calibrated Real Business Cycle models to estimated dynamic stochastic general equilibrium models. The purpose is to suggest the usefulness of these models as a tool for policy analysis, with a particular emphasis on aspects of monetary policy. (JEL classification: D58, E50)Cited by:

The first extension is the dynamic Nelson-Siegel model (DNS), while the second takes this dynamic version and makes it arbitrage-free (AFNS). Diebold and Rudebusch show how these two models are just slightly different implementations of a single unified approach to dynamic yield curve modeling and forecasting.3/5(4). Abstract: A standard macroeconomic specification is that the aggregate economy is directed by a single, smart representative agent using optimal decision rules. This paper explores an alternative conjecture--that the dynamic behavior of markets is often better interpreted as the interactions of many heterogeneous, rule-of-thumb agents who are loosely coupled in smart systems--much .

Get this from a library! Yield curve modeling and forecasting: the dynamic Nelson-Siegel approach. [Francis X Diebold; Glenn D Rudebusch] -- Understanding the dynamic evolution of the yield curve is critical to many financial tasks, including pricing financial assets and their derivatives, managing financial risk, allocating portfolios. We develop new methods for representing the asset-pricing implications of stochastic general equilibrium models. We provide asset-pricing counterparts to impulse response functions and the resulting dynamic value decompositions (DVDs).These methods quantify the exposures of macroeconomic cash flows to shocks over alternative investment horizons and the Cited by:

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Arbitrage-Free Bond Pricing with Dynamic Macroeconomic Models Michael F. Gallmeyer, Burton Hollifield, Francisco Palomino, Stanley E. Zin. NBER Working Paper No. Issued in July NBER Program(s):Asset Pricing, Monetary Economics We examine the relationship between monetary-policy-induced changes in short interest rates and yields on long-maturity Cited by: Request PDF | Arbitrage-Free Bond Pricing with Dynamic Macroeconomic Models | The authors examine the relationship between changes in short-term.

Michael F. Gallmeyer & Burton Hollifield & Francisco Palomino & Stanley E. Zin, "Arbitrage-Free Bond Pricing with Dynamic Macroeconomic Models," NBER Working PapersNational Bureau of Economic Research, Inc.

Arbitrage-Free Bond Pricing with Dynamic Macroeconomic Models Michael F. Gallmeyer, Burton Hollifield, Francisco Palomino, and Stanley E. Zin NBER Working Paper No. July JEL No. E4,G0,G1 ABSTRACT We examine the relationship between monetary-policy-induced changes in short interest rates and yields on long-maturity default-free by: Michael F.

Gallmeyer & Burton Hollifield & Francisco J. Palomino & Stanley E. Zin, "Arbitrage-free bond pricing with dynamic macroeconomic models," Review, Federal Reserve Bank of St.

Louis, vol. 89(Jul), pages Get this from a library. Arbitrage-free bond pricing with dynamic macroeconomic models. [Michael F Gallmeyer; National Bureau of Economic Research.;] -- We examine the relationship between monetary-policy-induced changes in short interest rates and yields on long-maturity default-free bonds.

The volatility of the long end of the term structure and. Arbitrage-Free Bond Pricing with Dynamic Macroeconomic Models. The authors examine the relationship between changes in short-term interest rates induced by monetary policy and the yields on long-maturity default-free bonds.

In this book, Francis Diebold and Glenn Rudebusch propose two extensions of the classic yield curve model of Nelson and Siegel that are both theoretically rigorous and empirically successful. The first extension is the dynamic Nelson-Siegel model (DNS), while the second takes this dynamic version and makes it arbitrage-free (AFNS).

Hsu, Alex, Francisco Palomino, and Charles Qian (). "The Decline in Asset Return Predictability and Macroeconomic Volatility," Finance and Economics Discussion Series Board of Governors of the Federal Reserve System (U.S.).

Kumbhat, Ashish, Francisco Palomino, and Ander Perez-Orive (). Modeling Bond Yields in Finance and Macroeconomics Francis X Diebold two prominent dynamic, latent factor models in this literature: the Nelson-Siegel and aﬃne ics in their arbitrage-free model, speciﬁcally, macro variables help determine yields but not the reverse.

Diebold, Rudebusch, and Aruoba () consider a general File Size: KB. Pamela Ann Labadie’s profile, publications, research topics, and co-authorsOccupation: Professor. makes it arbitrage-free; we call it \arbitrage-free Nelson Siegel" (AFNS).

Indeed the two models are just slightly di erent imple-mentations of a single, uni ed approach to dynamic yield curve modeling and forecasting. DNS has been highly successful em-pirically and can easily be made arbitrage-free (i.e., converted xi.

DNS and makes it arbitrage-free; we call it \arbitrage-free Nel-son Siegel" (AFNS). Indeed the two models are just slightly dif-ferent implementations of a single, uni ed approach to dynamic yield curve modeling and forecasting. DNS has been highly suc-cessful empirically and can easily be made arbitrage-free (i.e., xiFile Size: KB.

The arbitrage-free NS (AFNS) model was first developed by Christensen et al. () to combine the advantages of parsimony and flexibility of the traditional reduced-form NS models (Nelson and. Recursive Macroeconomic Theory Second edition Lars Ljungqvist Stockholm School of Economics Thomas J.

Sargent The log normal bond pricing model. formulation of optimization and equilibrium. j-step pricing ker-nel. Arbitrage-free pricing.

Consumption strips and the. The concepts of arbitrage-free, "rational", pricing and equilibrium are then coupled with the above to derive "classical" (or "neo-classical") financial economics. Rational pricing is the assumption that asset prices (and hence asset pricing models) will reflect the arbitrage-free price of the asset, as any deviation from this price will be.

Understanding the dynamic evolution of the yield curve is critical to many financial tasks, including pricing financial assets and their derivatives, managing financial risk, allocating portfolios, structuring fiscal debt, conducting monetary policy, and valuing capital goods.

Unfortunately, most yield curve models tend to be theoretically rigorous but empirically disappointing, or empirically. Arbitrage pricing theory (APT) is a multi-factor asset pricing model based on the idea that an asset's returns can be predicted using the linear relationship between the asset’s expected return.

The first extension is the dynamic Nelson-Siegel model (DNS), while the second takes this dynamic version and makes it arbitrage-free (AFNS). Diebold and Rudebusch show how these two models are just slightly different implementations of a single unified approach to dynamic yield curve modeling and forecasting.2/5(2).

Arbitrage-free bond pricing with dynamic macroeconomic models This includes both regulating and stabilizing the functions of the excitation system (rate feedback or lead-lag compensation).

Excitation system models of generators of Balti and Eesti power plants. The book is designed for academics, students, and practitioners working in yield curve modeling and forecasting, and it will be useful for all interested in bond markets and their links with the macroeconomic environment."—Malgorzata Doman, Zentralblatt MATH "This lucid and concise book is unique in the field of term structure modeling.The first extension is the dynamic Nelson-Siegel model (DNS), while the second takes this dynamic version and makes it arbitrage-free (AFNS).

Diebold and Rudebusch show how these two models are just slightly different implementations of a single unified approach to dynamic yield curve modeling and by: Economic models derive prices from the fundamental characteristics of an economy3 Financial claims are promises of payments at various points in the future: for example, a stock is a claim on future dividends; a bond is a claim over coupons and principal; an option is a claim over the future value of another asset.