Critical Finance Review > Vol 10 > Issue 1

Taking the Cochrane-Piazzesi Term Structure Model Out of Sample: More Data, Additional Currencies, and FX Implications

Robert J. Hodrick, Columbia Business School, Columbia University and NBER, USA, rh169@gsb.columbia.edu , Tuomas Tomunen, Carroll School of Management, Boston College, USA, tuomas.tomunen@bc.edu
 
Suggested Citation
Robert J. Hodrick and Tuomas Tomunen (2021), "Taking the Cochrane-Piazzesi Term Structure Model Out of Sample: More Data, Additional Currencies, and FX Implications", Critical Finance Review: Vol. 10: No. 1, pp 83-123. http://dx.doi.org/10.1561/104.00000107

Publication Date: 01 Apr 2021
© 2021 Robert J. Hodrick and Tuomas Tomunen
 
Subjects
 
Keywords
G12G15
Affine term structure modelsBond and foreign currency risk premiumsOut-of-sample forecasting
 

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In this article:
1. Introduction 
2. The Cochrane-Piazzesi Term Structure Model 
3. Estimation Results for Nine Term Structures 
4. International Implications 
5. Out-of-Sample Results 
6. Related Literature 
7. Conclusions 
Appendix 
A. Data 
B. The Affine Model Solutions 
C. The Standard Errors 
References 

Abstract

We examine the statistical term structure model of cochrane and Piazzesi (2005) and its affine counterpart, developed in cochrane and Piazzesi (2008) in several out-of-sample analyzes. The model’s one-factor forecasting structure characterizes the term structures of additional currencies in samples ending in 2003. In post-2003 data one-factor structures again characterize each currency’s term structure, but we reject equality of the coefficients across the two samples. We derive some implications of the affine model for the predictability of cross-currency investments, but we find little support for these predictions in either pre-2004 or post-2003 data. The models’ forecasts fail to beat historical average return forecasts of excess rates of return for bonds and currencies in recursive out-of-sample analyses.

DOI:10.1561/104.00000107