An Extended Macro-Finance Model with Financial Factors

Hans Dewachter and Leonardo Iania

No 2950, CESifo Working Paper Series from CESifo

Abstract: This paper extends the benchmark Macro-Finance model by introducing, next to the standard macroeconomic factors, additional liquidity-related and return forecasting factors. Liquidity factors are obtained from a decomposition of the TED spread while the return-forecasting (risk premium) factor is extracted by imposing a single factor structure on the one-period expected excess holding returns. The model is estimated on US data using MCMC techniques. Two findings stand out. First, the model outperforms significantly most structural and non-structural Macro-Finance yield curve models in terms of cross-sectional fit of the yield curve. Second, we find that financial shocks, either in the form of liquidity or risk premium shocks, have a statistically and economically significant impact on the yield curve. The impact of financial shocks extends throughout the yield curve but is most pronounced at the high and intermediate frequencies.

Keywords: yield curve; affine models; macroeconomics and financial factors; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 E44 G12 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: An Extended Macro-Finance Model with Financial Factors (2012)
Journal Article: An Extended Macro-Finance Model with Financial Factors (2011)
Working Paper: An extended macro-finance model with financial factors (2009)
Working Paper: An Extended Macro-Finance Model with Financial Factors (2009)
Working Paper: An Extended Macro-Finance Model with Financial Factors (2009)
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