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Decomposing the Yield Curve

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Author Info

  • Monika Piazzesi

    (Stanford University)

  • John Cochrane

    (Chicago GSB)

Abstract

We construct an affine model that incorporates bond risk premia. By understanding risk premia, we are able to use a lot of information from well-measured risk-neutral dyanmics to characterize real expectations. We use the model to decompose the yield curve into expected interest rate and risk premium components. We characterize the interesting term structure of risk premia -- a forward rate reflects expected excess returns many years into the future, and current slope and curvature factors forecast future expected returns even though they do not forecast current returns.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 18.

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Date of creation: 2009
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Handle: RePEc:red:sed009:18

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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Cited by:
  1. Hamilton, James D. & Wu, Jing Cynthia, 2014. "Risk premia in crude oil futures prices," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 9-37.
  2. Anella Munro, 2014. "Exchange rates, expected returns and risk," Reserve Bank of New Zealand Discussion Paper Series DP2014/01, Reserve Bank of New Zealand.

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