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Bond Risk Premia Forecasting : A Simple Approach for Extracting Macroeconomic Information from a Panel of Indicators
Journal
Econometric Reviews
ISSN
0747-4938
ISSN-Digital
1532-4168
Type
journal article
Date Issued
2014
Author(s)
Abstract
We propose a simple but effective estimation procedure to extract the level and the volatility dynamics of a latent macroeconomic factor from a panel of observable indicators. Our approach is based on a multivariate conditionally heteroscedastic exact factor model that can take into account the heteroscedasticity feature shown by most macroeconomic variables and relies on an iterated Kalman filter procedure. In simulations we show the unbiasedness of the proposed estimator and its superiority to different approaches introduced in the literature. Simulation results are confirmed in applications to real inflation data with the goal of forecasting long-term bond risk premia. Moreover, we find that the extracted level and conditional variance of the latent factor for inflation are strongly related to NBER business cycles.
Language
English
Keywords
Macroeconomic variables
Exact factor model
Kalman filter
Heteroscedasticity
Forecasting bond risk premia
Inflation measures
Business cycles
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Quantitative Economic Methods
Refereed
Yes
Publisher
Taylor & Francis
Publisher place
Philadelphia
Volume
2014
Number
online seit 08.13 - forthcoming
Start page
1
End page
43
Pages
43
Subject(s)
Division(s)
Eprints ID
223242