IDEAS home Printed from https://ideas.repec.org/p/fip/fednsr/102914.html

When Long-Run Trends Are Unknown: Bond Pricing Implications

Author

Abstract

We propose a macro-finance model in which inflation, growth, and the policy rate are driven by unobservable long-run trends and transitory cycles that investors must infer from aggregate data. Their subjective estimates of these trends, and the uncertainty surrounding them, are priced into the Treasury yield curve in a tractable way through both interest rate expectations and bond risk premia. Empirical estimates reveal an upward smooth trend in the long-run real interest rate (r-star) until the 1980s, and large investor uncertainty with confidence bands on as wide as 3.4 percentage points, contrasting with the volatile rate implied by perfect information models.

Suggested Citation

  • Borel Ahonon & Guillaume Roussellet, 2026. "When Long-Run Trends Are Unknown: Bond Pricing Implications," Staff Reports 1187, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:102914
    DOI: 10.59576/sr.1187
    as

    Download full text from publisher

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1187.pdf
    File Function: Full text
    Download Restriction: no
    File URL: https://www.newyorkfed.org/research/staff_reports/sr1187.html
    File Function: Full text
    Download Restriction: no
    File URL: https://libkey.io/10.59576/sr.1187?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Michael T. Kiley, 2020. "What Can the Data Tell Us about the Equilibrium Real Interest Rate?," International Journal of Central Banking, International Journal of Central Banking, vol. 16(3), pages 181-209, June.
    2. Sophia Cho & John C. Williams, 2025. "Are Financial Markets Good Predictors of R‑Star?," Liberty Street Economics 20250825, Federal Reserve Bank of New York.
    3. Monika Piazzesi & Martin Schneider, 2009. "Trend and cycle in bond premia," Staff Report 424, Federal Reserve Bank of Minneapolis.
    4. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    5. Daniel Andrei & Michael Hasler & Alexandre Jeanneret, 2019. "Asset Pricing with Persistence Risk," The Review of Financial Studies, Society for Financial Studies, vol. 32(7), pages 2809-2849.
    6. Kim, Don H. & Orphanides, Athanasios, 2012. "Term Structure Estimation with Survey Data on Interest Rate Forecasts," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(1), pages 241-272, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sophocles N. Brissimis & Evangelia A. Georgiou, 2022. "The effects of Federal Reserve's quantitative easing and balance sheet normalization policies on long-term interest rates," Working Papers 299, Bank of Greece.
    2. Cordeiro, Werley & Caldeira, João F. & Moura, Guilherme V., 2025. "Forecasting the Brazilian yield curve using macroeconomics expectations and time-varying volatility," The Quarterly Review of Economics and Finance, Elsevier, vol. 104(C).
    3. Pericoli, Marcello & Taboga, Marco, 2012. "Bond risk premia, macroeconomic fundamentals and the exchange rate," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 42-65.
    4. Dewachter, Hans & Iania, Leonardo, 2011. "An Extended Macro-Finance Model with Financial Factors," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(6), pages 1893-1916, December.
    5. Hamilton, James D. & Wu, Jing Cynthia, 2012. "Identification and estimation of Gaussian affine term structure models," Journal of Econometrics, Elsevier, vol. 168(2), pages 315-331.
    6. Joyce, Michael A.S. & Lildholdt, Peter & Sorensen, Steffen, 2010. "Extracting inflation expectations and inflation risk premia from the term structure: A joint model of the UK nominal and real yield curves," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 281-294, February.
    7. Christensen, Jens H.E. & Diebold, Francis X. & Rudebusch, Glenn D., 2011. "The affine arbitrage-free class of Nelson-Siegel term structure models," Journal of Econometrics, Elsevier, vol. 164(1), pages 4-20, September.
    8. Alberto Caruso & Laura Coroneo, 2019. "Predicting interest rates in real-time," Discussion Papers 19/18, Department of Economics, University of York.
    9. Gregory Bauer & Antonio Diez de los Rios, 2012. "An International Dynamic Term Structure Model with Economic Restrictions and Unspanned Risks," Staff Working Papers 12-5, Bank of Canada.
    10. Malik, Sheheryar & Meldrum, Andrew, 2016. "Evaluating the robustness of UK term structure decompositions using linear regression methods," Journal of Banking & Finance, Elsevier, vol. 67(C), pages 85-102.
    11. Paul Söderlind, 2010. "Reaction of Swiss Term Premia to Monetary Policy Surprises," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 146(1), pages 385-404, March.
    12. Creal, Drew D. & Wu, Jing Cynthia, 2015. "Estimation of affine term structure models with spanned or unspanned stochastic volatility," Journal of Econometrics, Elsevier, vol. 185(1), pages 60-81.
    13. Argyropoulos Efthymios & Tzavalis Elias, 2015. "Term spread regressions of the rational expectations hypothesis of the term structure allowing for risk premium effects," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 19(1), pages 49-70, February.
    14. Lloyd, Simon P., 2020. "Estimating nominal interest rate expectations: Overnight indexed swaps and the term structure," Journal of Banking & Finance, Elsevier, vol. 119(C).
    15. David K. Backus & Jonathan H. Wright, 2007. "Cracking the Conundrum," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 293-329.
    16. Backus, David & Zin, Stanley E. & Chernov, Mikhail & Zviadadze, Irina, 2013. "Monetary policy risk: Rules vs. discretion," CEPR Discussion Papers 9611, Centre for Economic Policy Research.
    17. Antonio Diez de Los Rios, 2015. "A New Linear Estimator for Gaussian Dynamic Term Structure Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 33(2), pages 282-295, April.
    18. Eric McCoy, 2019. "A Calibration of the Term Premia to the Euro Area," European Economy - Discussion Papers 110, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    19. Canlin Li & Min Wei, 2012. "Term structure modelling with supply factors and the Federal Reserve's Large Scale Asset Purchase programs," Finance and Economics Discussion Series 2012-37, Board of Governors of the Federal Reserve System (U.S.).
    20. Peter Hördahl & Oreste Tristani, 2014. "Inflation Risk Premia in the Euro Area and the United States," International Journal of Central Banking, International Journal of Central Banking, vol. 10(3), pages 1-47, September.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • 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
    • 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:102914. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Gabriella Bucciarelli (email available below). General contact details of provider: https://edirc.repec.org/data/frbnyus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.