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The Recent Shift in Term Structure Behavior from a No-Arbitrage Macro-Finance Perspective

  • Tao Wu
  • Glenn Rudebusch

This paper examines a recent shift in the dynamics of the term structure and interest rate risk. We first use standard yield-spread regressions to document such a shift in the U.S. in the mid-1980s. Over the pre- and post-shift subsamples, we then estimate dynamic, affine, no-arbitrage models, which exhibit a significant difference in behavior that can be largely attributed to changes in the pricing of risk associated with a "level" factor. Finally, we suggest a link between the shift in term structure behavior and changes in the risk and dynamics of the inflation target as perceived by investors

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 3.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:3
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