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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. Peter Hordahl & Oreste Tristani & David Vestin, 2004. "A joint econometric model of macroeconomic and term structure dynamics," Money Macro and Finance (MMF) Research Group Conference 2003 48, Money Macro and Finance Research Group.
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Cited by:
  1. Pavol Povala & Anna Cieslak, 2012. "Understanding bond risk premia," 2012 Meeting Papers 771, Society for Economic Dynamics.
  2. Dewachter, Hans & Iania, Leonardo & Lyrio, Marco, 2011. "A New-Keynesian Model of the Yield Curve with Learning Dynamics: A Bayesian Evaluation," Insper Working Papers wpe_250, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  3. Hans Dewachter & Leonardo Iania & Marco Lyrio, 2014. "Information in the yield curve: A Macro-Finance approach," Working Paper Research 254, National Bank of Belgium.
  4. Chadha, Jagjit S. & Waters, Alex, 2014. "Applying a macro-finance yield curve to UK quantitative Easing," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 68-86.

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