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Studies in Nonlinear Dynamics & Econometrics

Ed. by Mizrach, Bruce

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Volume 19, Issue 1


Efficient bond price approximations in non-linear equilibrium-based term structure models

Martin M. Andreasen
  • Corresponding author
  • CCBS, Bank of England and Centre for Macroeconomics, Bank of England, Threadneedle Street, London, EC2R 8AH, UK
  • Email
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
/ Pawel Zabczyk
  • CCBS, Bank of England and Centre for Macroeconomics, Bank of England, Threadneedle Street, London, EC2R 8AH, UK
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
Published Online: 2014-02-27 | DOI: https://doi.org/10.1515/snde-2012-0005


This paper develops an efficient method to compute higher-order perturbation approximations of bond prices. At third order, our approach can significantly shorten the approximation process and its precision exceeds the log-normal method and a procedure using consol bonds. The efficiency gains greatly facilitate any estimation which is illustrated by considering a long-run risk model for the US. Allowing for an unconstrained intertemporal elasticity of substitution enhances the model’s fit, and we see further improvements when incorporating stochastic volatility and external habits.

This article offers supplementary material which is provided at the end of the article.

Keywords: DSGE model; habit model; higher order perturbation method; long-run risk; stochastic volatility

JEL: C68; E0


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About the article

Corresponding author: Martin M. Andreasen, Aarhus University, Fuglesangs Allé 4, 8210 Aarhus V, Denmark, e-mail:

Published Online: 2014-02-27

Published in Print: 2015-02-01

Citation Information: Studies in Nonlinear Dynamics & Econometrics, Volume 19, Issue 1, Pages 1–33, ISSN (Online) 1558-3708, ISSN (Print) 1081-1826, DOI: https://doi.org/10.1515/snde-2012-0005.

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