Predictability of Bond Risk Premia with an Affine Term Structure Model

85 Pages·2017·2.61 MB·English

CCiittyy UUnniivveerrssiittyy ooff NNeeww YYoorrkk ((CCUUNNYY))
CCUUNNYY AAccaaddeemmiicc WWoorrkkss
Dissertations, Theses, and Capstone Projects CUNY Graduate Center
2-2016
PPrreeddiiccttaabbiilliittyy ooff BBoonndd RRiisskk PPrreemmiiaa wwiitthh aann AAffiffinnee TTeerrmm SSttrruuccttuurree
MMooddeell
Sibel Korkmaz
Graduate Center, City University of New York
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PREDICTABILITY OF BOND RISK PREMIA WITH AN AFFINE TERM STRUCTURE MODEL
by
SIBEL KORKMAZ
A dissertationsubmittedto theGraduateFacultyinBusinessin partialfulfillmentofthe
requirementsforthedegreeofDoctorofPhilosophy,TheCityUniversityofNewYork
2016
c 2016
(cid:13)
SIBEL KORKMAZ
AllRightsReserved
ii
Thismanuscripthasbeenread and accepted bytheGraduateFacultyinBusinessinsatisfactionof
thedissertationrequirementfor thedegreeofDoctorofPhilosophy.
ProfessorLiuren Wu
Date Chair ofExaminingCommittee
ProfessorWim Vijverberg
Date ExecutiveOfficer
ProfessorLiuren Wu
ProfessorMichael Grossman
ProfessorJianHua
Supervisory Committee
THE CITY UNIVERSITY OF NEW YORK
iii
Abstract
PREDICTABILITY OF BOND RISK PREMIA WITH AN AFFINE TERM STRUCTURE MODEL
by
SIBEL KORKMAZ
Adviser: ProfessorLiuren Wu
This thesis focuses on zero-coupon bond risk premia. In chapter 1 first I summarize the literature
that defines expectation hypothesis, time variation in bond risk premia, well known macroeco-
nomic and variety of technical indicators which predict bond return forecasts. Then, I continue
with introducing a high dimensional affine dynamic term structure model and unscented Kalman
filtering as its estimation technique.In chapter 2, I explore predictive capacity of the estimated la-
tent states of this term structure model. I constructed a single return forecasting factor by using
these states. I report comparison of well known excess bond return forecasting factors’ predictive
performance with the one I construct. I found that this single factor has superior performance in
predicting excess bond returns and future macro activity especially for the sample period which
includes the Great Recession. In chapter 3, I develop a two step estimation technique to extract
market price of risk from time dimension of zero-coupon bond prices. I also provide robustness
resultsinthischapter.
iv
Acknowledgments
I am grateful to my advisor Prof. Liuren Wu for his generous expert guidance, understanding
andsupportduringpreparationofthisdissertation. IamgladIhadthechanceofbeinghisstudent.
It was apleasuretowork withhim.
My sincere gratitude also goes to Prof. Michael Grossmann. I want to thank him for always
makingmefeel hishelpinghandsinceIentertheprogram. In addition,Igreatly appreciated Prof.
MerihUctumfor alwayssupporting,encouragingand guidingme.
I want to thank Prof. Jian Hua for discussing and evaluating this thesis. I also would like to
thankScientific andTechnologicalResearch Council ofTurkeyfortheirfinancial support.
Finally,Iwant tothankmy husbandandfriends fortheircopy editingworkand support.
v
Contents
Contents vi
ListofTables viii
ListofFigures x
Introduction 1
1 Literature Review,Model Specification and Estimation 4
1.1 LiteratureReview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.2 Specification andEstimationoftheAffineTermStructure Model . . . . . . . . . . 7
1.2.1 Term StructureModel: . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.2.2 Data: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.2.3 EstimationMethodology: . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2 Predictability ofExcess Bond Returns 18
2.1 Predictiveregressions: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.2 Singlereturn forecastingfactor: . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.3 Singlereturn forecastingfactor overdifferentholdingperiods: . . . . . . . . . . . 23
2.4 Predictingmacroeconomicactivity: . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.5 Out-of-sampleAnalysis: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
vi
3 Extracting Bond RiskPremia andRobustness 28
3.1 Extractingmarketpriceofrisk . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.1.1 Modeldynamicsand estimationofmarketprice risk: . . . . . . . . . . . . 29
3.1.2 Estimationand predictiveregressionsresults: . . . . . . . . . . . . . . . . 31
3.2 DifferentSpecifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.3 Robustness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.3.1 Stabilityoverdifferentdatasets andsampleperiods: . . . . . . . . . . . . . 33
3.3.2 Modelstabilitycheck byusinglearning: . . . . . . . . . . . . . . . . . . . 34
3.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Bibliography 37
Appendix 70
vii
List of Tables
3.1 ParameterestimatesofDTSM . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
3.2 SummaryStatisticsofbondexcessreturns . . . . . . . . . . . . . . . . . . . . . . 45
3.3 Unrestrictedpredictiveregressions . . . . . . . . . . . . . . . . . . . . . . . . . . 46
3.4 Firststep regression’saverageadjustedR2 ofaverage . . . . . . . . . . . . . . . . 47
3.5 Singlefactorregression’sadjustedR2s . . . . . . . . . . . . . . . . . . . . . . . . 48
3.6 Predictabilityofbondexcess returnsat different holdingperiods: 1995-2007 . . . . 49
3.7 Predictabilityofbondexcess returnsat different holdingperiods: 1995-2009 . . . . 50
3.8 Predictiveexcess bondreturns regressionson monthlysinglefactors . . . . . . . . 51
3.9 Predictabilityat different holdingperiodswithmonthlydata: 1995-2007 . . . . . . 52
3.10 Predictabilityat different holdingperiodswithmonthlydata: 1995-2009 . . . . . . 53
3.11 Predictiveregressionswithsinglefactors: 12-monthinvestmenthorizon . . . . . . 54
3.12 Predictiveregressionswithsinglefactors: 1-monthinvestmenthorizon . . . . . . . 55
3.13 Predictiveregressionswithunspannedimpliedvolatility . . . . . . . . . . . . . . 56
3.14 Economicactivitypredictedby singlefactors . . . . . . . . . . . . . . . . . . . . 57
3.15 Out-of-SampleForecast R2s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
3.16 ParameterestimatesofDTSM withtimevaryingriskpremia . . . . . . . . . . . . 59
3.17 PredictivepowerofSDSRF factorwithtimevaryingrisk premia . . . . . . . . . . 60
3.18 Comparisonofexcess returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
3.19 Regressionswith Fama-Blissdata: First Step . . . . . . . . . . . . . . . . . . . . 61
viii
3.20 Regressionswith Fama-Blissdata: Second Step . . . . . . . . . . . . . . . . . . . 62
3.21 Excessbondreturns predictabilityby unspannedimpliedvolatility . . . . . . . . . 74
ix