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How Important Are Inflation Expectations for the Nominal Yield Curve?
[Pricing the term structure with linear regressions]

Author

Listed:
  • Roberto Gomez-Cram
  • Amir Yaron

Abstract

Macrofinance term structure models rely too heavily on the volatility of expected inflation news as a source for variations in nominal bond yield shocks. We develop and estimate a model featuring inflation nonneutrality and preference shocks. The stochastic volatility of inflation and consumption govern bond risk premiums movements, whereas preference shocks generate fluctuations in real rates. The model accounts for key bond market features without resorting to an overly dominating expected inflation channel. The estimation shows that preference shocks are strongly negatively correlated with market distress factors and that real rate news is the dominant driver of nominal yield shocks.

Suggested Citation

  • Roberto Gomez-Cram & Amir Yaron, 2021. "How Important Are Inflation Expectations for the Nominal Yield Curve? [Pricing the term structure with linear regressions]," The Review of Financial Studies, Society for Financial Studies, vol. 34(2), pages 985-1045.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:2:p:985-1045.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa039
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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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