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Dissecting the yield curve: The international evidence

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  • Berardi, Andrea
  • Plazzi, Alberto

Abstract

We develop a term structure model that decomposes nominal yields into the sum of an expectation, term premium, and convexity term and in turn of their real and inflation counterparts. The model explicitly captures the interrelation between yield-only and macroeconomic factors while allowing for aggregate stochastic volatility. We extract the components from the nominal and real yield curve of the United States, the Euro Area, the United Kingdom, and Japan. We find that short-rate expectations have steadily declined over the last two decades and account for the bulk of yield dynamics. Term premia increase with maturity but explain a smaller fraction of yield forecast error variance than previously documented. With regard to yield comovement, the United States generates the strongest spillovers at the long end of the yield curve, whereas the Japanese market is the top importer of shocks.

Suggested Citation

  • Berardi, Andrea & Plazzi, Alberto, 2022. "Dissecting the yield curve: The international evidence," Journal of Banking & Finance, Elsevier, vol. 134(C).
  • Handle: RePEc:eee:jbfina:v:134:y:2022:i:c:s0378426621002429
    DOI: 10.1016/j.jbankfin.2021.106286
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    More about this item

    Keywords

    Term structure; Term premium; Yield volatility; Macro factors; Comovement;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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