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

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  • Tao Wu
  • Glenn Rudebusch

Abstract

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

Suggested Citation

  • Tao Wu & Glenn Rudebusch, 2005. "The Recent Shift in Term Structure Behavior from a No-Arbitrage Macro-Finance Perspective," Computing in Economics and Finance 2005 3, Society for Computational Economics.
  • Handle: RePEc:sce:scecf5:3
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    References listed on IDEAS

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    Cited by:

    1. René Garcia & Richard Luger, 2007. "The Canadian macroeconomy and the yield curve: an equilibrium-based approach," Canadian Journal of Economics, Canadian Economics Association, vol. 40(2), pages 561-583, May.
    2. Kozicki, Sharon & Tinsley, P.A., 2008. "Term structure transmission of monetary policy," The North American Journal of Economics and Finance, Elsevier, vol. 19(1), pages 71-92, March.
    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. Bennouna, Hicham & Bounader, Lahcen, 2018. "Analyse de la transmission de la politique monétaire vers les taux souverains," Document de travail 2018-2, Bank Al-Maghrib, Département de la Recherche.
    5. EL FAIZ, Zakaria & ZIANI, Manal, 2016. "Influence de la politique monétaire sur le taux long Quelques évidences empiriques, cas du Maroc
      [The impact of monetary on long rates : Some empirical evidence from Morocco]
      ," MPRA Paper 72817, University Library of Munich, Germany.
    6. Daniel Burren, 2010. "The Term Structure of Interest Rates in a New Keynesian Model with Time-Varying Macro Volatility," Annals of Economics and Finance, Society for AEF, vol. 11(2), pages 277-299, November.
    7. Zeno Rotondi, 2006. "The Macroeconomy and the Yield Curve: A Review of the Literature with Some New Evidence," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 65(2), pages 193-224, November.
    8. Matiur Rahman & Muhammad Mustafa, 2009. "The Slope of the U.S. Nominal Treasury Yield Curve and the Exchange Rate," New York Economic Review, New York State Economics Association (NYSEA), vol. 40(1), pages 3-12.
    9. Balázs Romhányi, 2005. "A learning hypothesis of the term structure of interest rates," Macroeconomics 0503001, EconWPA.
    10. Sharon Kozicki & Gordon H. Sellon, 2005. "Longer-term perspectives on the yield curve and monetary policy," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 5-33.

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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