A no-arbitrage macro finance approach to the term structure of interest rates
This work analysis the main macro-finance models of the term structure of interest rates that determines the joint dynamics of the term structure and the macroeconomic fundamentals under a no-arbitrage approach. There has been a long search during the past decades of trying to study the relationship between the term structure of interest rates and the economy, to the extent that much of recent research has combined elements of finance, monetary economics, and the macroeconomics to analyse the term structure. The central interest of the thesis is based on two important notions. Firstly, it is picking up from the important work of Ang and Piazzesi (2003) model who suggested a joint macro-finance strategy in a discrete time affine setting, by also imposing the classical Taylor (1993) rule to determine the association between yields and macroeconomic variables through monetary policy. There is a strong intuition from the Taylor rule literature that suggests that such macroeconomic variables as inflation and real activity should matter for the interest rate, which is the monetary policy instrument. Since from this important framework, no-arbitrage macro-finance approach to the term structure of interest rates has become an active field of cross-disciplinary research between financial economics and macroeconomics. Secondly, the importance of forecasting the yield curve using the variations on the Nelson and Siegel (1987) exponential components framework to capture the dynamics of the entire yield curve into three dimensional parameters evolving dynamically. Nelson-Siegel approach is a convenient and parsimonious approximation method which has been trusted to work best for fitting and forecasting the yield curve. The work that has caught quite much of interest under this framework is the generalized arbitrage-free Nelson-Siegel macrofinance term structure model with macroeconomic fundamentals, (Li et al. (2012)), that characterises the joint dynamic interaction between yields and the macroeconomy and the dynamic relationship between bond risk-premia and the economy. According to Li et al. (2012), risk-premia is found to be closely linked to macroeconomic activities and its variations can be analysed. The approach improves the estimation and the challenges on identification of risk parameters that has been faced in recent macro-finance literature.