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

Robert J. Hodrick, Tuomas Tomunen

NBER Working Paper No. 25092
Issued in September 2018
NBER Program(s):Asset Pricing, International Finance and Macroeconomics

We examine the Cochrane and Piazzesi (2005, 2008) model 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 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 model fails to beat historical average returns in recursive out-or-sample forecasting of excess rates of return for bonds and currencies.

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Document Object Identifier (DOI): 10.3386/w25092

 
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