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  • Journal of Financial and Quantitative Analysis, Volume 47, Issue 1
  • February 2012, pp. 241-272

Term Structure Estimation with Survey Data on Interest Rate Forecasts

  • Don H. Kim (a1) and Athanasios Orphanides (a2)
  • DOI:
  • Published online: 16 December 2011

The estimation of dynamic no-arbitrage term structure models with a flexible specification of the market price of risk is beset by severe small-sample problems arising from the highly persistent nature of interest rates. We propose using survey forecasts of a short-term interest rate as an additional input to the estimation to overcome the problem. To illustrate the methodology, we estimate the 3-factor affine-Gaussian model with U.S. Treasury yields data and demonstrate that incorporating information from survey forecasts mitigates the small-sample problem. The model thus estimated for the 1990–2003 sample generates a stable and sensible estimate of the expected path of the short rate, reproduces the well-known stylized patterns in the expectations hypothesis tests, and captures some of the short-run variations in the survey forecast of the changes in longer-term interest rates.

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