A0577
Title: Demographic distribution and bond pricing: A semi-parametric affine arbitrage-free yield curve model
Authors: Zongwu Cai - The University of Kansas (United States)
Jiazi Chen - Xiamen University (China)
Linlin Niu - Wang Yanan Institute for Studies in Economics, Xiamen University (China) [presenting]
Abstract: Life cycle consumption and savings decision in individuals determine the aggregate savings and interest rate level as the demographic structure changes along time. We build a semi-parametric affine arbitrage-free yield curve model, to incorporate a slow moving determinant of interest rate levels explained by the evolving age distribution and its expectation. Estimating the model with US data from 1950s to present, we find the extracted long term determinant captures very well the smooth trend in US yields. The business cycle component is well explained by a VAR with macro or latent variables. It produces better forecast performance than a traditional autoregressive yield curve model without time-varying means or with simple demographic ratio as explanatory variable.
