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Risk and Policy Shocks on the US Term Structure

Enzo Weber and Juergen Wolters

No 438, University of Regensburg Working Papers in Business, Economics and Management Information Systems from University of Regensburg, Department of Economics

Abstract: We document two stylised facts of US short- and long-term interest rate data incompatible with the pure expectations hypothesis: Relatively slow adjustment to long-run relations and low contemporaneous correlation. We construct a small structural model which features three types of randomness: While a persistent monetary policy shock implies immediate identical reactions through the term structure, both a transitory policy shock and an autocorrelated risk premium allow for the sustained decoupling observed in the data. Indeed, we find important impacts and persistence of risk premia and a decomposition of policy shocks judging a larger part as transitory the longer the investment horizon.

Keywords: Expectations Hypothesis; Risk Premium; Policy Reaction Function; Persistence; Transitory Shocks (search for similar items in EconPapers)
JEL-codes: C32 E43 (search for similar items in EconPapers)
Date: 2010-03-16
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mac and nep-mon
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Journal Article: Risk and Policy Shocks on the US Term Structure (2013) Downloads
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