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A Unified HJM Approach to Non-Markov Gaussian Dynamic Term Structure Models: International Evidence

Li, H.
; 
Ye, Xiaoxia
; 
Yu, F.
Publication Date
28/07/2016
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Keywords
Non-Markov, Gaussian dynamic term structure models, Excess returns, International bond markets, Moving averages, Forecasting
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Management and Law Publications
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Abstract
Motivated by an extensive literature showing that government bond yields exhibit a strong non-Markov property, in the sense that moving averages of long-lagged yields significantly improve the predictability of excess bond returns. We then develop a systematic approach of constructing non-Markov Gaussian dynamic term structure models (GDTSMs) under the Heath-Jarrow-Morton (HJM) framework. Compared to the current literature, our approach is more flexible and parsimonious, enabling us to estimate an economically significant non-Markov effect that helps predict excess bond returns both in-sample and out-of-sample.
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http://hdl.handle.net/10454/14322
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Li H, Ye X and Yu F (2016) A Unified HJM Approach to Non-Markov Gaussian Dynamic Term Structure Models: International Evidence.
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https://doi.org/10.2139/ssrn.2155538
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