Zero-Coupon Yields and the Cross-Section of Bond Prices | Zendy

N. Aaron Pancost | Zendy

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Zero-Coupon Yields and the Cross-Section of Bond Prices

Author(s) -

N. Aaron Pancost

Publication year - 2021

Publication title -

the review of asset pricing studies

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.356

H-Index - 19

eISSN - 2045-9939

pISSN - 2045-9920

DOI - 10.1093/rapstu/raab002

Subject(s) - coupon , bond , bond valuation , econometrics , affine term structure model , economics , treasury , zero coupon bond , yield curve , short rate , convexity , financial economics , mathematics , mathematical economics , finance , geography , archaeology

I estimate a dynamic term structure model on an unbalanced panel of Treasury coupon bonds, without relying on an interpolated zero-coupon yield curve. A linearity-generating model, which separates the parameters that govern the cross-sectional and time-series moments of the model, takes about 8 min to estimate on a sample of over 1 million bond prices. The traditional exponential affine model takes about 2 hr, because of a convexity term in coupon-bond prices that cannot be concentrated out of the cross-sectional likelihood. I quantify the on-the-run premium and a “notes versus bonds” premium from 1990 to 2017 in a single, easy-to-estimate no-arbitrage model. (JEL G12, G14, C33) Received: April 30, 2018; editorial decision November 3, 2020 by Editor Nikolai Roussanov

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