Monetary Policy and Bond Risk Premia in the US and the UK

Wojciech Zurowski
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Wojciech Zurowski: University of Lugano and Swiss Finance Institute

No 17-42, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: I filter expected inflation, unemployment and log GDP Hodrick-Prescott filtered series in order to extrapolate different frequencies of shocks. These shocks are then regressed on contemporaneous yields to assess the impact of monetary policy ingredients on the current state of the economy. Furthermore, I obtain a single factor which contains information from the Taylor like monetary policy rule about the future state of the economy. This factor can predict between 32% and 74% of the variation of excess bond risk premia in the sample. Additionally, the factor unveils differences between monetary policy in the US and the UK through a variation in predictability across maturities. It also provides further evidence of importance of the macroeconomic variables and their predictive value for the term premia. This factor is highly correlated with other factors from previous studies yet it provides additional information to what is already captured by them. The out of sample results demonstrate that the factor can be a good predictor only if it is constructed under time variability assumption and the central bank's policy is not affected by additional tools such as quantitative easing.

Keywords: bond risk premia; monetary policy; Haar filter (search for similar items in EconPapers)
JEL-codes: E44 G12 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2017-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1742

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