Term Structure Models Flashcards
1
Q
Price of P_nt ZCB (SDF)
A
compounded SDF M_t+1M_t+2…M_t+n
2
Q
Nominal SDF
A
M_t+1 $ * Inflation = M_t+1
3
Q
Foreign SDF. Then Derive this.
A
M_t+1 * = M_t+1 * Q_t / Q_t+1 where Q_t+1 is the dollar per foreign exchange rate.
4
Q
Solution concept for term premium
A
Guess functional form. Prove by induction, after solving for first period.
5
Q
Arithmetic risk premium of bonds
A
RP = -Cov_t (p_n-1,t+1,m_t+1)
6
Q
Restrictions of K-factor models
A
1) Variance covariance matrix of bond returns has rank K; 2) Bond yields capture all predictability of future bond yields
7
Q
Evidence against spanning bond factor models
A
1) Lags of forward rates predict bond returns; 2) lagged macro variables survey forecasts predict macro variables, even when conditioning on bond yields
