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An Extended Macro-Finance Model with Financial Factors

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  • Dewachter, Hans
  • Iania, Leonardo

Abstract

This paper extends the benchmark Macro-Finance model by introducing, next to the standard macroeconomic factors, additional liquidity-related and return forecasting factors. Liquidity factors are obtained from a decomposition of the TED spread while the return-forecasting (risk premium) factor is extracted by imposing a single factor structure on excess holding returns. The model is estimated on US data using MCMC techniques. Two findings stand out. First, the model outperforms Macro-Finance benchmark models in fitting the yield curve. Second, financial shocks, either in the form of liquidity or risk premium shocks, have a statistically and economically significant impact on the yield curve.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 18840.

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Date of creation: 02 Oct 2009
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Handle: RePEc:pra:mprapa:18840

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Keywords: Term structure; Macro-finance; TED spread; Interbank lending rates;

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References

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  1. Marco Lyrio & Hans Dewachter & Konstantijn Maes, 2006. "A joint model for the term structure of interest rates and the macroeconomy," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(4), pages 439-462.
  2. Hans Dewachter & Marco Lyrio, 2008. "Learning, Macroeconomic Dynamics and the Term Structure of Interest Rates," NBER Chapters, in: Asset Prices and Monetary Policy, pages 191-245 National Bureau of Economic Research, Inc.
  3. Peter Hordahl & Oreste Tristani & David Vestin, 2003. "A joint econometric model of macroeconomic and term structure," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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  7. Dewachter, H.D.R. & Lyrio, M., 2003. "Macro factors and the Term Structure of Interest Rates," Research Paper ERS-2003-037-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
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  23. Hans Dewachter, 2008. "Imperfect information, macroeconomic dynamics and the yield curve : an encompassing macro-finance model," Working Paper Research 144, National Bank of Belgium.
  24. 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.
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Citations

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Cited by:
  1. Dewachter, Hans & Iania, Leonardo & Lyrio, Marco, 2011. "A New-Keynesian Model of the Yield Curve with Learning Dynamics: A Bayesian Evaluation," Ibmec Working Papers wpe_250, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  2. Dewachter, Hans & Iania, Leonardo & Lyrio, Marco, 2011. "Information in the Yield Curve: A Macro-Finance Approach," Ibmec Working Papers wpe_230, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.

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