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No-arbitrage macroeconomic determinants of the yield curve

  • Ruslan Bikbov

    ()

  • Mikhail Chernov

    ()

    (London School of Economics - London School of Economics)

No-arbitrage macro-finance models use variance decompositions to gauge the extent of association between the macro variables and yields. We show that results generated by this approach are sensitive to the order of variables in the recursive identification scheme. In a four-factor model, one may obtain 18 different sets of answers out of 24 possible. We propose an alternative measure that is based on levels of macro variables as opposed to shocks. We account for the correlation between the macro and latent factors via projection of the latter onto the former. As a result, the association between macro variables and yields can be computed uniquely via an . Macro variables explain 80% of the variation in the short rate and 50% of the slope, and 54% to 68% of the term premia.

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File URL: http://hal.archives-ouvertes.fr/docs/00/73/25/17/PDF/PEER_stage2_10.1016%252Fj.jeconom.2010.05.004.pdf
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Paper provided by HAL in its series Post-Print with number hal-00732517.

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Date of creation: 15 Sep 2010
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Publication status: Published, Journal of Econometrics, 2010, 159, 1, 166
Handle: RePEc:hal:journl:hal-00732517
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