Real risk, inflation risk, and the term structure
AbstractI present a model for the term structures of nominal and real interest rates in the UK that incorporates Markov-switching and allows for non-neutralities, nonlinear dynamics, and flexibility in the dynamics of the risk premia. The model is used to assess how accurately the term structure reflects changing expectations of future yields and inflation. I find that variations in inflation expected over the next two to three years are very accurately reflected by current yields. Over longer horizons, the term structures closely track changing expectations regarding future nominal and real yields but not future inflation. Copyright 2003 Royal Economic Society.
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Bibliographic InfoArticle provided by Royal Economic Society in its journal The Economic Journal.
Volume (Year): 113 (2003)
Issue (Month): 487 (04)
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Postal: Office of the Secretary-General, School of Economics and Finance, University of St. Andrews, St. Andrews, Fife, KY16 9AL, UK
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Other versions of this item:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
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