IDEAS home Printed from https://ideas.repec.org/p/bay/rdwiwi/29825.html
   My bibliography  Save this paper

Capturing the Interaction of Trend, Cycle, Expectations and Risk Premia in the US Term Structure

Author

Listed:
  • Soloschenko, Max
  • Weber, Enzo

Abstract

This paper deals with simultaneous interactions between the determinants of the US yield curve. For this purpose, we derive a multivariate unobserved components model based on the expectation hypothesis. The influencing factors of the term structure that arise from the structural model are a common stochastic trend, the cyclical part of the short rate and maturity-dependent term premiums in the longer rates. We establish a significant influence of both permanent and transitory innovations on the US term structure and find pronounced spillovers between the shocks of the term structure determinants. An interesting result depicts a key role of the spillovers of structural mid-term rate cycle shocks in the formation of the risk premiums.

Suggested Citation

  • Soloschenko, Max & Weber, Enzo, 2014. "Capturing the Interaction of Trend, Cycle, Expectations and Risk Premia in the US Term Structure," University of Regensburg Working Papers in Business, Economics and Management Information Systems 475, University of Regensburg, Department of Economics.
    • Handle: RePEc:bay:rdwiwi:29825
    as

    Download full text from publisher

    File URL: https://epub.uni-regensburg.de/29825/1/TermStructureUC.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. James C. Morley, 2007. "The Slow Adjustment of Aggregate Consumption to Permanent Income," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2‐3), pages 615-638, March.
    2. Qiang Dai & Kenneth J. Singleton, 2000. "Specification Analysis of Affine Term Structure Models," Journal of Finance, American Finance Association, vol. 55(5), pages 1943-1978, October.
    3. Tara M. Sinclair, 2009. "The Relationships between Permanent and Transitory Movements in U.S. Output and the Unemployment Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 529-542, March.
    4. Richard Startz & Kwok Ping Tsang, 2010. "An Unobserved Components Model of the Yield Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(8), pages 1613-1640, December.
    5. Stock, James H & Watson, Mark W, 1988. "Variable Trends in Economic Time Series," Journal of Economic Perspectives, American Economic Association, vol. 2(3), pages 147-174, Summer.
    6. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    7. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    8. Sentana, Enrique & Fiorentini, Gabriele, 2001. "Identification, estimation and testing of conditionally heteroskedastic factor models," Journal of Econometrics, Elsevier, vol. 102(2), pages 143-164, June.
    9. Enzo Weber & Jürgen Wolters, 2013. "Risk and Policy Shocks on the US Term Structure," Scottish Journal of Political Economy, Scottish Economic Society, vol. 60(1), pages 101-119, February.
    10. Kim, Don H. & Orphanides, Athanasios, 2012. "Term Structure Estimation with Survey Data on Interest Rate Forecasts," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(1), pages 241-272, February.
    11. Unknown, 2005. "Forward," 2005 Conference: Slovenia in the EU - Challenges for Agriculture, Food Science and Rural Affairs, November 10-11, 2005, Moravske Toplice, Slovenia 183804, Slovenian Association of Agricultural Economists (DAES).
    12. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    13. Frederic S. Mishkin, 1990. "The Information in the Longer Maturity Term Structure about Future Inflation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(3), pages 815-828.
    14. Enzo Weber & Jürgen Wolters, 2012. "The US term structure and central bank policy," Applied Economics Letters, Taylor & Francis Journals, vol. 19(1), pages 41-45, January.
    15. Dewachter, Hans & Lyrio, Marco, 2006. "Macro Factors and the Term Structure of Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 119-140, February.
    16. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, February.
    17. Glenn D. Rudebusch & Tao Wu, 2007. "Accounting for a Shift in Term Structure Behavior with No-Arbitrage and Macro-Finance Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 395-422, March.
    18. Christoph Schleicher, 2003. "Structural Time-Series Models with Common Trends and Common Cycles," Computing in Economics and Finance 2003 108, Society for Computational Economics.
    19. Jean-Marie Dufour, 1997. "Some Impossibility Theorems in Econometrics with Applications to Structural and Dynamic Models," Econometrica, Econometric Society, vol. 65(6), pages 1365-1388, November.
    20. Estrella, Arturo & Hardouvelis, Gikas A, 1991. "The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-576, June.
    21. Glenn D. Rudebusch, 2006. "Monetary Policy Inertia: Fact or Fiction?," International Journal of Central Banking, International Journal of Central Banking, vol. 2(4), December.
    22. Zuliu Hu, 1993. "The Yield Curve and Real Activity," IMF Working Papers 1993/019, International Monetary Fund.
    23. Nelson, Charles R. & Startz, Richard, 2007. "The zero-information-limit condition and spurious inference in weakly identified models," Journal of Econometrics, Elsevier, vol. 138(1), pages 47-62, May.
    24. Chang-Jin Kim & Charles R. Nelson, 1999. "Has The U.S. Economy Become More Stable? A Bayesian Approach Based On A Markov-Switching Model Of The Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 608-616, November.
    25. Gabriel Perez-Quiros & Margaret M. McConnell, 2000. "Output Fluctuations in the United States: What Has Changed since the Early 1980's?," American Economic Review, American Economic Association, vol. 90(5), pages 1464-1476, December.
    26. Zuliu Hu, 1993. "The Yield Curve and Real Activity," IMF Staff Papers, Palgrave Macmillan, vol. 40(4), pages 781-806, December.
    27. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 309-338.
    28. Kozicki, Sharon & Tinsley, P. A., 2001. "Shifting endpoints in the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 613-652, June.
    29. Monika Piazzesi, 2005. "Bond Yields and the Federal Reserve," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 311-344, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Glenn D. Rudebusch & Eric T. Swanson & Tao Wu, 2006. "The Bond Yield "Conundrum" from a Macro-Finance Perspective," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 24(S1), pages 83-109, December.
    2. Glenn D. Rudebusch & Tao Wu, 2008. "A Macro‐Finance Model of the Term Structure, Monetary Policy and the Economy," Economic Journal, Royal Economic Society, vol. 118(530), pages 906-926, July.
    3. Glenn D. Rudebusch & Tao Wu, 2007. "Accounting for a Shift in Term Structure Behavior with No-Arbitrage and Macro-Finance Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 395-422, March.
    4. Richard K. Crump & Stefano Eusepi & Emanuel Moench, 2016. "The term structure of expectations and bond yields," Staff Reports 775, Federal Reserve Bank of New York.
    5. Glenn D. Rudebusch, 2010. "Macro‐Finance Models Of Interest Rates And The Economy," Manchester School, University of Manchester, vol. 78(s1), pages 25-52, September.
    6. Enzo Weber & Jürgen Wolters, 2013. "Risk and Policy Shocks on the US Term Structure," Scottish Journal of Political Economy, Scottish Economic Society, vol. 60(1), pages 101-119, February.
    7. Refet S. Gürkaynak & Jonathan H. Wright, 2012. "Macroeconomics and the Term Structure," Journal of Economic Literature, American Economic Association, vol. 50(2), pages 331-367, June.
    8. Glenn D. Rudebusch & Tao Wu, 2004. "The recent shift in term structure behavior from a no-arbitrage macro-finance perspective," Working Paper Series 2004-25, Federal Reserve Bank of San Francisco.
    9. Massimo Guidolin & Manuela Pedio, 2019. "Forecasting and Trading Monetary Policy Effects on the Riskless Yield Curve with Regime Switching Nelson†Siegel Models," Working Papers 639, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    10. Aguiar-Conraria, Luís & Martins, Manuel M.F. & Soares, Maria Joana, 2012. "The yield curve and the macro-economy across time and frequencies," Journal of Economic Dynamics and Control, Elsevier, vol. 36(12), pages 1950-1970.
    11. Massimo Guidolin & Manuela Pedio, 2019. "Forecasting and Trading Monetary Policy Switching Nelson-Siegel Models," BAFFI CAREFIN Working Papers 19106, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    12. Enzo Weber, 2011. "Analyzing U.S. Output and the Great Moderation by Simultaneous Unobserved Components," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(8), pages 1579-1597, December.
    13. Márcio Laurini & João Frois Caldeira, 2012. "Some Comments on a Macro-Finance Model with Stochastic Volatility," IBMEC RJ Economics Discussion Papers 2012-04, Economics Research Group, IBMEC Business School - Rio de Janeiro.
    14. Huse, Cristian, 2011. "Term structure modelling with observable state variables," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3240-3252.
    15. Andr? Kurmann & Christopher Otrok, 2013. "News Shocks and the Slope of the Term Structure of Interest Rates," American Economic Review, American Economic Association, vol. 103(6), pages 2612-2632, October.
    16. Adam Traczyk, 2013. "Financial integration and the term structure of interest rates," Empirical Economics, Springer, vol. 45(3), pages 1267-1305, December.
    17. Francesco Audrino & Kameliya Filipova, 2009. "Yield Curve Predictability, Regimes, and Macroeconomic Information: A Data-Driven Approach," University of St. Gallen Department of Economics working paper series 2009 2009-10, Department of Economics, University of St. Gallen.
    18. Kozicki, Sharon & Tinsley, P.A., 2008. "Term structure transmission of monetary policy," The North American Journal of Economics and Finance, Elsevier, vol. 19(1), pages 71-92, March.
    19. Doshi, Hitesh & Jacobs, Kris & Liu, Rui, 2018. "Macroeconomic determinants of the term structure: Long-run and short-run dynamics," Journal of Empirical Finance, Elsevier, vol. 48(C), pages 99-122.
    20. Carlo A. Favero & Arie E. Gozluklu & Haoxi Yang, 2016. "Demographics and the Behavior of Interest Rates," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(4), pages 732-776, November.

    More about this item

    Keywords

    unobserved components; expectation hypothesis; cointegration; identification; risk premium;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bay:rdwiwi:29825. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Gernot Deinzer (email available below). General contact details of provider: https://edirc.repec.org/data/wfregde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.