Resolving the Spanning Puzzle in Macro-Finance Term Structure Models

Michael Bauer and Glenn Rudebusch

No 5187, CESifo Working Paper Series from CESifo

Abstract: Previous macro-finance term structure models (MTSMs) imply that macroeconomic state variables are spanned by (i.e., perfectly correlated with) model-implied bond yields. However, this theoretical implication appears inconsistent with regressions showing that much macroeconomic variation is unspanned and that the unspanned variation helps forecast excess bond returns and future macroeconomic fluctuations. We resolve this contradiction—or “spanning puzzle”—by reconciling spanned MTSMs with the regression evidence, thus salvaging the previous macro-finance literature. Furthermore, we statistically reject “unspanned” MTSMs, which are an alternative resolution of the spanning puzzle, and show that their knife-edge restrictions are economically unimportant for determining term premia.

Keywords: yield curve; term structure models; macro-finance; unspanned macro risks; monetary policy (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Resolving the Spanning Puzzle in Macro-Finance Term Structure Models (2017)
Working Paper: Resolving the spanning puzzle in macro-finance term structure models (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_5187

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