Abstract
In this paper, we test the multivariate model of securities’ excess returns formulated by Engle et al. (1990) on an expanded set of maturities. By applying their methodology to the entire Treasury term structure, we consider the applicability of a parsimonious common factor approach to the dynamics of short-, medium-, and long-term interest rates. We extend their methodology to incorporate asymmetric GARCH representations, in which the slope of the yield curve (and its sign) affects the evolution of the conditional variance of excess returns in fixed-income and equity markets. We find this approach quite successful in explaining the comovements of excess returns on the spectrum of Treasury issues for the 1962–1992 period.
We acknowledge the comments of John Barkoulas and participants at the 1995 Conference of the Society for Computational Economics. The usual disclaimer applies.
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Baum, C.F., Bekdache, B. (1997). Factor-GARCH Modeling of the Treasury Term Structure. In: Amman, H., Rustem, B., Whinston, A. (eds) Computational Approaches to Economic Problems. Advances in Computational Economics, vol 6. Springer, Boston, MA. https://doi.org/10.1007/978-1-4757-2644-2_1
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DOI: https://doi.org/10.1007/978-1-4757-2644-2_1
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