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The causal structure of bond yields

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  • Wang, Zijun

Abstract

This paper implements an emerging data-driven method of directed acyclic graphs to study the contemporaneous causal structure among the federal funds rate and U.S. Treasury bond yields of various maturities. Using high frequency daily data from 1994 to 2009, we find that innovations in the two-year Treasury bond yield play a central role. They contemporaneously cause most other bond yields. Therefore, monetary policy makers would benefit from closely monitoring the two-year yield in setting the interest rate target, a result echoing the policy rule suggested by Piazzesi (Journal of Political Economy, 2005). Both Fed and investors should also watch the seven-year bond yield because it explains significant portions of variability in many other yields.

Suggested Citation

  • Wang, Zijun, 2012. "The causal structure of bond yields," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(1), pages 93-102.
    • Handle: RePEc:eee:quaeco:v:52:y:2012:i:1:p:93-102
    DOI: 10.1016/j.qref.2012.01.002
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    More about this item

    Keywords

    Term structure; Monetary policy; Directed graphs; Error variance decomposition;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other

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