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An Extended Macro-Finance Model with Financial Factors

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  • Dewachter, Hans
  • Iania, Leonardo

Abstract

This paper extends the benchmark Macro-Finance model by introducing, next to the standard macroeconomic factors, additional liquidity-related and return forecasting factors. Liquidity factors are obtained from a decomposition of the TED spread while the return-forecasting (risk premium) factor is extracted by imposing a single factor structure on excess holding returns. The model is estimated on US data using MCMC techniques. Two findings stand out. First, the model outperforms Macro-Finance benchmark models in fitting the yield curve. Second, financial shocks, either in the form of liquidity or risk premium shocks, have a statistically and economically significant impact on the yield curve.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 46 (2011)
Issue (Month): 06 (December)
Pages: 1893-1916

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Handle: RePEc:cup:jfinqa:v:46:y:2011:i:06:p:1893-1916_00

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References

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Citations

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Cited by:
  1. Hans Dewachter & Leonardo Iania & Marco Lyrio, 2014. "Information in the yield curve: A Macro-Finance approach," Working Paper Research 254, National Bank of Belgium.
  2. Chadha, Jagjit S. & Waters, Alex, 2014. "Applying a macro-finance yield curve to UK quantitative Easing," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 68-86.
  3. Pavol Povala & Anna Cieslak, 2012. "Understanding bond risk premia," 2012 Meeting Papers 771, Society for Economic Dynamics.
  4. Dewachter, Hans & Iania, Leonardo & Lyrio, Marco, 2011. "A New-Keynesian Model of the Yield Curve with Learning Dynamics: A Bayesian Evaluation," Insper Working Papers wpe_250, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.

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