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A no-arbitrage structural vector autoregressive model of the UK yield curve

  • Kaminska, Iryna

    ()

    (Bank of England)

This paper combines a structural vector autoregression (SVAR) with a no-arbitrage approach to build a multifactor affine term structure model (ATSM). The resulting no-arbitrage structural vector autoregressive (NA-SVAR) model implies that expected excess returns are driven by the structural macroeconomic shocks. This is in contrast to a standard ATSM, in which agents are concerned with non-structural risks. As a simple application of a NA-SVAR model, we study the effects of supply, demand and monetary policy shocks on the UK yield curve. We show that all shocks affect the slope of the yield curve, with demand and supply shocks accounting for a large part of the time variation in bond yields. The short end of the yield curve is driven mainly by the expectations component, while the term premium matters for the dynamics of the long end of the yield curve.

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Paper provided by Bank of England in its series Bank of England working papers with number 357.

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Length: 33 pages
Date of creation: 22 Dec 2008
Date of revision:
Handle: RePEc:boe:boeewp:0357
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  1. Glenn D. Rudebusch & Eric T. Swanson & Tao Wu, 2006. "The bond yield "conundrum" from a macro-finance perspective," Working Paper Series 2006-16, Federal Reserve Bank of San Francisco.
  2. Andrew Ang & Geert Bekaert & Min Wei, 2007. "The Term Structure of Real Rates and Expected Inflation," NBER Working Papers 12930, National Bureau of Economic Research, Inc.
  3. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
  4. Bagliano, Fabio C. & Favero, Carlo A., 1998. "Measuring monetary policy with VAR models: An evaluation," European Economic Review, Elsevier, vol. 42(6), pages 1069-1112, June.
  5. Nicola Anderson & John Sleath, 2001. "New estimates of the UK real and nominal yield curves," Bank of England working papers 126, Bank of England.
  6. Ang, Andrew & Piazzesi, Monika & Wei, Min, 2006. "What does the yield curve tell us about GDP growth?," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 359-403.
  7. Andrew Ang & Sen Dong & Monika Piazzesi, 2005. "No-arbitrage Taylor rules," Proceedings, Federal Reserve Bank of San Francisco.
  8. Lutz Kilian, 1998. "Small-Sample Confidence Intervals For Impulse Response Functions," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 218-230, May.
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