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Estimation of a rational expectations model of the term structure
Authors:Angelo Melino  
Affiliation:1. Key Laboratory of Superlight Materials & Surface Technology of Ministry of Education, Harbin Engineering University, Harbin 150001, PR China;2. School of Materials Science and Engineering, China University of Petroleum (East China), Qingdao 266580, PR China;1. Universitat Politècnica de Catalunya, Department of Project and Construction Engineering, Group of Construction Research and Innovation (GRIC), C/Colom, 11, Ed. TR5, 08222 Terrassa, Barcelona, Spain;2. Università Politecnica delle Marche, Department of Civil and Building Engineering and Architecture, Via delle Brecce Bianche, 60100 Ancona, Italy;1. Department of Economics, West Virginia University, 1601 University Ave., P.O. Box 6025, Morgantown, WV 26505, USA;2. Department of Economics, Binghamton University, Binghamton, NY 13902, USA;3. Stavanger Business School, Stavanger, Norway;2. Natural Resources Institute Finland (Luke), Green Technology, FI-31600 Jokioinen, Finland
Abstract:This paper shows how to represent a vector autoregression (VAR) in terms of the eigenvalues and eigenvectors of its companion matrix. This representation is used to impose the exact restrictions implied by the expectations hypothesis on the VAR for short and long term interest rates and to calculate the restricted maximum likelihood estimates. The first difference representation for short and long rates used by Sargent (1979) is shown to be inconsistent with the expectations hypothesis, but a VAR with two unit roots is constructed that satisfies the exact restrictions and leads to similar restricted estimates.
Keywords:Rational expectations   Term structure   Restrictions
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