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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Term structure estimation with survey data on interest rate forecasts
Don H. Kim
Athanasios Orphanides
Abstract

The estimation of dynamic no-arbitrage term structure models with a flexible specification of the market price of risk is beset by a severe small-sample problem arising from the highly persistent nature of interest rates. We propose using survey forecasts of a short-term interest rate as additional input to the estimation to overcome the problem. The three-factor pure-Gaussian model thus estimated with the U.S. Treasury term structure for the 1990-2003 period generates a stable estimate of the expected path of the short rate, reproduces the well-known stylized patterns in the expectations hypothesis tests, and captures some of the short-run variations in the survey forecast of the changes in longer-term interest rates.


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Don H. Kim & Athanasios Orphanides, Term structure estimation with survey data on interest rate forecasts, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2005-48, 2005.
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Keywords: Interest rates ; Economic forecasting ; Econometric models
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