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Information in the yield curve: A Macro-Finance approach

  • Hans Dewachter

    ()

    (National Bank of Belgium, Research Department
    Center for Economic Studies, University of Leuven
    CESifo)

  • Leonardo Iania

    ()

    (National Bank of Belgium, Research Department
    Louvain School of Management (UCL))

  • Marco Lyrio

    ()

    (Insper Institute of Education and Research)

We use a macro-finance model, incorporating macroeconomic and financial factors, to study the term premium in the U.S. bond market. Estimating the model using Bayesian techniques, we find that a single factor explains most of the variation in bond risk premiums. Furthermore, the model-implied risk premiums account for up to 40% of the variability of one- and two-year excess returns. Using the model to decompose yield spreads into an expectations and a term premium component, we find that, although this decomposition does not seem important to forecast economic activity, it is crucial to forecast inflation for most forecasting horizons.

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Paper provided by National Bank of Belgium in its series Working Paper Research with number 254.

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Length: 34 pages
Date of creation: Mar 2014
Date of revision:
Handle: RePEc:nbb:reswpp:201403-254
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  1. Feldhütter, Peter & Lando, David, 2008. "Decomposing swap spreads," Journal of Financial Economics, Elsevier, vol. 88(2), pages 375-405, May.
  2. Dewachter, H.D.R. & Lyrio, M., 2003. "Macro factors and the Term Structure of Interest Rates," ERIM Report Series Research in Management ERS-2003-037-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  3. Hans Dewachter & Leonardo Iania, 2010. "An Extended Macro-Finance Model with Financial Factors," CESifo Working Paper Series 2950, CESifo Group Munich.
  4. Andrew Ang & Monika Piazzesi & Min Wei, 2003. "What does the yield curve tell us about GDP growth?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  5. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2014. "Do Central Bank Liquidity Facilities Affect Interbank Lending Rates?," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 32(1), pages 136-151, January.
  6. Harvey,Andrew C., 1990. "Forecasting, Structural Time Series Models and the Kalman Filter," Cambridge Books, Cambridge University Press, number 9780521321969, June.
  7. Seonghoon Cho & Antonio Moreno & Geert Bekaert, 2005. "New-Keynesian Macroeconomics and the Term Structure," Faculty Working Papers 04/05, School of Economics and Business Administration, University of Navarra.
  8. Glenn D. Rudebusch & Brian P. Sack & Eric T. Swanson, 2007. "Macroeconomic implications of changes in the term premium," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 241-270.
  9. Plosser, Charles I. & Geert Rouwenhorst, K., 1994. "International term structures and real economic growth," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 133-155, February.
  10. Peter Hördahl & Oreste Tristani & David Vestin, 2008. "The Yield Curve and Macroeconomic Dynamics," Economic Journal, Royal Economic Society, vol. 118(533), pages 1937-1970, November.
  11. Joseph G. Haubrich & Ann M. Dombrosky, 1996. "Predicting real growth using the yield curve," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 26-35.
  12. Carlo Favero & Iryna Kaminska & Ulf Soderstrom, 2005. "The Predictive Power of the Yield Spread: Further Evidence and a Structural Interpretation," Working Papers 280, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  13. Hans Dewachter & Marco Lyrio, 2008. "Learning, Macroeconomic Dynamics and the Term Structure of Interest Rates," NBER Chapters, in: Asset Prices and Monetary Policy, pages 191-245 National Bureau of Economic Research, Inc.
  14. Eric T. Swanson, 2007. "What we do and don't know about the term premium," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jul20.
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