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Expectations and risk premia at 8:30am: Macroeconomic announcements and the yield curve

Author

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  • Peter Hördahl
  • Eli M Remolona
  • Giorgio Valente

Abstract

We investigate the movements of the yield curve after the release of major U.S. macroeconomic announcements through the lenses of an arbitrage-free dynamic term structure model with macroeconomic fundamentals. Combining estimated yield responses obtained using high-frequency data with model estimates using monthly data, we show that bond yields move after announcements mostly because of revisions to expectations about short-term interest rates. Changes in risk premia are also sizable, partly offset the effects of short-rate expectations and help to account for the hump-shaped pattern across maturities. Most announcement responses are due to changes in expectations about the output gap.

Suggested Citation

  • Peter Hördahl & Eli M Remolona & Giorgio Valente, 2015. "Expectations and risk premia at 8:30am: Macroeconomic announcements and the yield curve," BIS Working Papers 527, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:527
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