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The Recent Shift in Term Structure Behavior from a No-Arbitrage Macro-Finance Perspective

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  • Tao Wu
  • Glenn Rudebusch

Abstract

This paper examines a recent shift in the dynamics of the term structure and interest rate risk. We first use standard yield-spread regressions to document such a shift in the U.S. in the mid-1980s. Over the pre- and post-shift subsamples, we then estimate dynamic, affine, no-arbitrage models, which exhibit a significant difference in behavior that can be largely attributed to changes in the pricing of risk associated with a "level" factor. Finally, we suggest a link between the shift in term structure behavior and changes in the risk and dynamics of the inflation target as perceived by investors

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 3.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:3

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Cited by:
  1. Sharon Kozicki & Gordon Sellon, 2005. "Longer-term perspectives on the yield curve and monetary policy," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 5-33.
  2. Balázs Romhányi, 2005. "A learning hypothesis of the term structure of interest rates," Macroeconomics 0503001, EconWPA.

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