The US Economy, the Treasury Bond Market and the Specification of Macro-Finance Models
AbstractThis paper addresses questions about the structure of the economy and financial markets raised by recent research on the term structure. The work of Duffee (2012) and Joslin, Preibsch and Singleton (2012) suggests that macroeconomic variables affect risk premia rather than bond yields, which are driven by just three factors as in the traditional model. This is consistent with the observation that the real world macro-dynamics appear to be much richer than the risk neutral dynamics underpinning the term structure. On the other hand, Cochrane and Piazzesi (2005) and (2010) suggest that premia are much simpler, depending upon a single return forecasting factor but not macro variables. This paper suggests that the traditional model is too restrictive, performing poorly at the long end. A model with two return-forecasting factors works remarkably well.
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Bibliographic InfoPaper provided by Department of Economics, University of York in its series Discussion Papers with number 13/22.
Date of creation: Aug 2013
Date of revision:
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Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
Phone: (0)1904 323776
Fax: (0)1904 323759
Web page: http://www.york.ac.uk/economics/
More information through EDIRC
Macro-finance; Kalman augmented VAR; term structure; interest rate expectations; risk premia;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
- 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
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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