Home

Shrinking the Term Structure

Abstract Views
14
Author
Damir Filipović Markus Pelger Ye Ye
Category
Financial
Date Posted
2022/08/04
Date Retrieved
2022/08/05
Date Revised
Empty
Date Written
2022/08/04
Description
We introduce a conditional factor model for the term structure of treasury bonds which unifies non-parametric curve estimation with cross-sectional asset pricing. Our robust flexible and easy-to-implement method learns the discount bond excess return curve directly from observed returns of treasury securities. This curve lies in a reproducing kernel Hilbert space which is derived from economic first principles and optimally trades off smoothness against return fitting. We show that a low dimensional factor model arises because a sparse set of basis functions spans the estimated discount bond excess return curves. The estimated factors are investable portfolios of traded assets which replicate the full term structure and are sufficient to hedge against interest rate changes. In an extensive empirical study on U.S. Treasuries we show that the discount bond excess return curve is well explained by four factors which capture polynomial shapes of increasing order and are necessary to explai
Downloads
6
Exports
0
JEL Classifications
C14 C38 C55 G12
Keywords
Term structure of interest rates bond returns factor space U.S. Treasury securities non-parametric method principal components machine learning in finance reproducing kernel Hilbert space
News Mentions
0
Pages
59
Random
560
Readers
0
Shares and Likes
0
Tweets
0
URL
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4182649
TOP