Abstract: The estimation of dynamic noarbitrage term structure models with a
flexible specification of the market price of risk is beset by a severe
smallsample problem arising from the highly persistent nature of interest
rates. We propose using survey forecasts of a shortterm interest rate as
additional input to the estimation to overcome the problem. The
threefactor pureGaussian model thus estimated with the U.S. Treasury term
structure for the 19902003 period generates a stable estimate of the
expected path of the short rate, reproduces the wellknown stylized
patterns in the expectations hypothesis tests, and captures some of the
shortrun variations in the survey forecast of the changes in longerterm
interest rates.
Keywords: Dynamic term structure models, survey data, interest rate forecasts, term premia, expectations hypothesis
Full paper (410 KB PDF)
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Last update: October 26, 2005
