Pricing the Term Structure with Linear Regressions - FEDERAL RESERVE BANK of NEW YORK

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Staff Reports

Pricing the Term Structure with Linear Regressions

August 2008 Number 340
Revised April 2013

JEL classification: G10, G12

Authors: Tobias Adrian, Richard K. Crump, and Emanuel Moench

We show how to price the time series and cross-section of the term structure of interest rates using a three-step linear regression approach. Our method allows computationally fast estimation of term structure models with a large number of pricing factors. We present specification tests favoring a model using five principal components of yields as factors. We demonstrate that this model outperforms the Cochrane-Piazzesi (2008) four-factor specification in out-of-sample exercises, but generates similar in-sample term premium dynamics. Our regression approach can also incorporate unspanned factors and allows estimation of term structure models without observing a zero-coupon yield curve.

Available only in PDF PDF

68 pages / 864 kb
Replication Files: Please contact Richard Crump for access.
Metadata pdf

For a published version of this report, see Tobias Adrian, Richard K. Crump, and Emanuel Moench, "Pricing the Term Structure with Linear Regressions," Journal of Financial Economics 110, no. 1 (October 2013): 110-138.

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