Stochastic correlation and risk premia in term structure models

Chiarella, C; Hsiao, CY; Tô, TD

Stochastic correlation and risk premia in term structure models

Chiarella, C Hsiao, CY Tô, TD

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Publication Type:: Journal Article
Citation:: Journal of Empirical Finance, 2016, 37 pp. 59 - 78
Issue Date:: 2016-06-01

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Field	Value	Language
dc.contributor.author	Chiarella, C	en_US
dc.contributor.author	Hsiao, CY	en_US
dc.contributor.author	Tô, TD	en_US
dc.date.issued	2016-06-01	en_US
dc.identifier.citation	Journal of Empirical Finance, 2016, 37 pp. 59 - 78	en_US
dc.identifier.issn	0927-5398	en_US
dc.identifier.uri	http://hdl.handle.net/10453/90331
dc.description.abstract	© 2016. This paper analyzes a term structure model that allows for both stochastic correlation between underlying factors and an extended market price of risk specification. We show that significant improvement in bond fitting and portfolio performance is obtained by the model. However, the restriction on market price of risk has a more negative impact on bond price fitting and forecasting, whereas the restriction on correlated factors has a more negative impact on hedging performance. The model has good predictive power for bond risk premia. Once our model factors are taken into account, other predictive factors become insignificant.	en_US
dc.relation.ispartof	Journal of Empirical Finance	en_US
dc.relation.isbasedon	10.1016/j.jempfin.2016.02.003	en_US
dc.subject.classification	Finance	en_US
dc.title	Stochastic correlation and risk premia in term structure models	en_US
dc.type	Journal Article
utslib.citation.volume	37	en_US
utslib.for	1402 Applied Economics	en_US
utslib.for	1403 Econometrics	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
utslib.copyright.status	closed_access
pubs.publication-status	Published	en_US
pubs.volume	37	en_US

Abstract:

© 2016. This paper analyzes a term structure model that allows for both stochastic correlation between underlying factors and an extended market price of risk specification. We show that significant improvement in bond fitting and portfolio performance is obtained by the model. However, the restriction on market price of risk has a more negative impact on bond price fitting and forecasting, whereas the restriction on correlated factors has a more negative impact on hedging performance. The model has good predictive power for bond risk premia. Once our model factors are taken into account, other predictive factors become insignificant.

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http://hdl.handle.net/10453/90331