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No-arbitrage macroeconomic determinants of the yield curve

Author

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  • Ruslan Bikbov
  • Mikhail Chernov

    (LSE - London School of Economics and Political Science)

Abstract

No-arbitrage macro-finance models use variance decompositions to gauge the extent of association between the macro variables and yields. We show that results generated by this approach are sensitive to the order of variables in the recursive identification scheme. In a four-factor model, one may obtain 18 different sets of answers out of 24 possible. We propose an alternative measure that is based on levels of macro variables as opposed to shocks. We account for the correlation between the macro and latent factors via projection of the latter onto the former. As a result, the association between macro variables and yields can be computed uniquely via an . Macro variables explain 80% of the variation in the short rate and 50% of the slope, and 54% to 68% of the term premia.

Suggested Citation

  • Ruslan Bikbov & Mikhail Chernov, 2010. "No-arbitrage macroeconomic determinants of the yield curve," Post-Print hal-00732517, HAL.
    • Handle: RePEc:hal:journl:hal-00732517
    DOI: 10.1016/j.jeconom.2010.05.004
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    More about this item

    Keywords

    C13; C22; G12; Macro-finance models; Term structure; Variance decomposition; Kalman filter;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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