Efficient bond price approximations in non-linear equilibrium-based term structure models
This paper develops an efficient method to compute higher-order perturbation approximations of bond prices. At third order, our approach can significantly shorten the approximation process and its precision exceeds the log-normal method and a procedure using consol bonds. The efficiency gains greatly facilitate any estimation which is illustrated by considering a long-run risk model for the US. Allowing for an unconstrained intertemporal elasticity of substitution enhances the model’s fit, and we see further improvements when incorporating stochastic volatility and external habits.
Year of publication: |
2015
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Authors: | Andreasen Martin M. ; Pawel, Zabczyk |
Published in: |
Studies in Nonlinear Dynamics & Econometrics. - De Gruyter, ISSN 1558-3708. - Vol. 19.2015, 1, p. 1-33
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Publisher: |
De Gruyter |
Saved in:
Online Resource
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