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Information in the yield curve: A Macro-Finance approach

Author

Listed:
  • Hans Dewachter

    (National Bank of Belgium, Research Department
    Center for Economic Studies, University of Leuven
    CESifo)

  • Leonardo Iania

    (National Bank of Belgium, Research Department
    Louvain School of Management (UCL))

  • Marco Lyrio

    (Insper Institute of Education and Research)

Abstract

We use a macro-finance model, incorporating macroeconomic and financial factors, to study the term premium in the U.S. bond market. Estimating the model using Bayesian techniques, we find that a single factor explains most of the variation in bond risk premiums. Furthermore, the model-implied risk premiums account for up to 40% of the variability of one- and two-year excess returns. Using the model to decompose yield spreads into an expectations and a term premium component, we find that, although this decomposition does not seem important to forecast economic activity, it is crucial to forecast inflation for most forecasting horizons.

Suggested Citation

  • Hans Dewachter & Leonardo Iania & Marco Lyrio, 2014. "Information in the yield curve: A Macro-Finance approach," Working Paper Research 254, National Bank of Belgium.
    • Handle: RePEc:nbb:reswpp:201403-254
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    More about this item

    Keywords

    Macro-finance model; Yield curve; Expectations hypothesis;
    All these keywords.

    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
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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