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Dissertations

Essays in asset pricing and macroeconomics

Ruslan Bikbov, 2006
Faculty Advisor: Mikhail Chernov
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Abstract

This thesis is an econometric investigation of the dynamic properties of the US fixed income markets in a no-arbitrage framework.

Traditional no-arbitrage models of the yield curve use a latent factor approach and extract those factors from the observed prices. Despite voluminous literature on this subject, we still have a limited understanding of the models' structural features which are important in practice. The first essay evaluates the ability of several affine latent factor models to explain the term structure of Eurodollar futures and options.

The second essay makes a step from introspective latent factor approach towards economically interpretable models. The essay suggests a methodology that replaces traditional latent factors, such as level, slope and curvature, with macro variables, such as inflation, real activity, budget deficit, and liquidity. Simultaneously, the methodology generates genuine exogenous shocks.

The third essay links the yield curve dynamics with monetary policy regimes. The essay develops a model of term structure that borrows identification assumptions from macroeconomic literature and allows for regime switching dynamics of the monetary policy rule. The effect of monetary policy regimes on the yield curve and risk premia is studied.

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