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An Extended Macro-Finance Model with Financial Factors

  • Dewachter, Hans
  • Iania, Leonardo

This paper extends the benchmark Macro-Finance model by introducing, next to the standard macroeconomic factors, additional liquidity-related and return forecasting factors. Liquidity factors are obtained from a decomposition of the TED spread while the return forecasting (risk premium) factor is extracted by imposing a single factor structure on the one-period expected excess holding returns. The model is estimated on US data using MCMC techniques. Two findings stand out. First, the model outperforms significantly most structural and non-structural Macro-Finance yield curve models in terms of cross-sectional fit of the yield curve. Second, we find that financial shocks, either in the form of liquidity or risk premium shocks have a statistically and economically significant impact on the yield curve. The impact of financial shocks extends throughout the yield curve and is most pronounced at the high- and intermediate frequencies.

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File URL: http://mpra.ub.uni-muenchen.de/18816/1/MPRA_paper_18816.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17634.

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Date of creation: 02 Oct 2009
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Handle: RePEc:pra:mprapa:17634
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  1. John Y. Campbell & Robert J. Shiller & Luis M. Viceira, 2009. "Understanding Inflation-Indexed Bond Markets," NBER Working Papers 15014, National Bureau of Economic Research, Inc.
  2. Gregory R. Duffee, 2011. "Information in (and not in) the Term Structure," Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 2895-2934.
  3. 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(01), pages 241-272, April.
  4. Peter Hordahl & Oreste Tristani & David Vestin, 2004. "A joint econometric model of macroeconomic and term structure dynamics," Money Macro and Finance (MMF) Research Group Conference 2003 48, Money Macro and Finance Research Group.
  5. Hans Dewachter & Marco Lyrio & Konstantijn Maes, 2001. "A Joint Model for the Term Structure of Interest Rates and the Macroeconomy," International Economics Working Papers Series wpie002, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics.
  6. Hans Dewachter & Marco Lyrio, 2002. "Macro Factors and the Term Structure of Interest Rates," International Economics Working Papers Series wpie007, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics.
  7. Glenn D. Rudebusch & Tao Wu, 2003. "A macro-finance model of the term structure, monetary policy, and the economy," Working Paper Series 2003-17, Federal Reserve Bank of San Francisco.
  8. Campbell, John Y. (ed.), 2008. "Asset Prices and Monetary Policy," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226092119.
  9. Feldhütter, Peter & Lando, David, 2008. "Decomposing swap spreads," Journal of Financial Economics, Elsevier, vol. 88(2), pages 375-405, May.
  10. John Y. Campbell, 2008. "Asset Prices and Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number camp06-1, 07.
  11. Andrew Ang & Sen Dong, 2005. "No-Arbitrage Taylor Rules," 2005 Meeting Papers 22, Society for Economic Dynamics.
  12. Antonio Moreno & Geert Bekaert & Seonghoon Cho, 2004. "New-Keynesian Macroeconomics and the Term Structure," 2004 Meeting Papers 388, Society for Economic Dynamics.
  13. Thomas Laubach and John C. Williams, 2001. "Measuring the Natural Rate of Interest," Computing in Economics and Finance 2001 35, Society for Computational Economics.
  14. Kozicki, Sharon & Tinsley, P. A., 2001. "Shifting endpoints in the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 613-652, June.
  15. 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.
  16. De Graeve, Ferre & Emiris, Marina & Wouters, Raf, 2009. "A structural decomposition of the US yield curve," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 545-559, May.
  17. David K. Backus & Jonathan H. Wright, 2007. "Cracking the Conundrum," NBER Working Papers 13419, National Bureau of Economic Research, Inc.
  18. 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.
  19. John H. Cochrane & Monika Piazzesi, 2002. "Bond Risk Premia," NBER Working Papers 9178, National Bureau of Economic Research, Inc.
  20. Wu, Tao, 2006. "Macro Factors and the Affine Term Structure of Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1847-1875, October.
  21. Qiang Dai & Kenneth J. Singleton, 2000. "Specification Analysis of Affine Term Structure Models," Journal of Finance, American Finance Association, vol. 55(5), pages 1943-1978, October.
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  23. Trehan, Bharat & Wu, Tao, 2007. "Time-varying equilibrium real rates and monetary policy analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1584-1609, May.
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  25. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02.
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