Challenges in macro-finance modeling

This article discusses various challenges in the specification and implementation of 'macro-finance' models in which macroeconomic variables and term structure variables are modeled together in a no-arbitrage framework. The author classifies macro-finance models into pure latent-factor mod...

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Published in:Review - Federal Reserve Bank of St. Louis 2009-09, Vol.91 (5(2)), p.519-544
Main Author: Kim, Don H
Format: Article
Language:English
Subjects:
Arbitrage
Financial engineering
Hypotheses
Impact analysis
Inflation
Macroeconomics
Mathematical finance
Monetary economics
Research methods
Structural change
Studies
Term structure
Variables
Yield curve
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creator Kim, Don H
description This article discusses various challenges in the specification and implementation of 'macro-finance' models in which macroeconomic variables and term structure variables are modeled together in a no-arbitrage framework. The author classifies macro-finance models into pure latent-factor models (`internal basis models') and models that have observed macroeconomic variables as state variables (`external basis models') and examines the underlying assumptions behind these models. Particular attention is paid to the issue of unspanned short-run fluctuations in macro-economic variables and their potentially adverse effect on the specification of external basis models. The author also discusses the challenge of addressing features such as structural breaks and time-varying inflation uncertainty. Empirical difficulties in the estimation and evaluation of macro-finance models are also discussed in detail. Reprinted by permission of the Federal Reserve Bank of St. Louis
doi_str_mv 10.20955/r.91.519-544
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source International Bibliography of the Social Sciences (IBSS); Business Source Ultimate; Social Science Premium Collection; ABI/INFORM Global; Politics Collection; PAIS Index; Alma/SFX Local Collection; EBSCO_EconLit with Full Text（美国经济学会全文数据库）
subjects Arbitrage
Financial engineering
Hypotheses
Impact analysis
Inflation
Macroeconomics
Mathematical finance
Monetary economics
Research methods
Structural change
Studies
Term structure
Variables
Yield curve
title Challenges in macro-finance modeling
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