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The causal structure of bond yields

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  • Wang, Zijun
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    Abstract

    This paper implements an emerging data-driven method of directed acyclic graphs to study the contemporaneous causal structure among the federal funds rate and U.S. Treasury bond yields of various maturities. Using high frequency daily data from 1994 to 2009, we find that innovations in the two-year Treasury bond yield play a central role. They contemporaneously cause most other bond yields. Therefore, monetary policy makers would benefit from closely monitoring the two-year yield in setting the interest rate target, a result echoing the policy rule suggested by Piazzesi (Journal of Political Economy, 2005). Both Fed and investors should also watch the seven-year bond yield because it explains significant portions of variability in many other yields.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1062976912000099
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    Bibliographic Info

    Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

    Volume (Year): 52 (2012)
    Issue (Month): 1 ()
    Pages: 93-102

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    Handle: RePEc:eee:quaeco:v:52:y:2012:i:1:p:93-102

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    Web page: http://www.elsevier.com/locate/inca/620167

    Related research

    Keywords: Term structure; Monetary policy; Directed graphs; Error variance decomposition;

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    References

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