Macro risks and the term structure of interest rates

Geert Bekaert, Eric Engstrom and Andrey Ermolov

Journal of Financial Economics, 2021, vol. 141, issue 2, 479-504

Abstract: We use non-Gaussian features in U.S. macroeconomic data to identify aggregate supply and demand shocks while imposing minimal economic assumptions. Macro risks represent the variables that govern the time-varying variance, skewness, and higher-order moments of these two shocks, with ”good” (”bad”) variance associated with positive (negative) skewness. We document that macro risks significantly contribute to the variation of yields and risk premiums for nominal bonds. While overall bond risk premiums are countercyclical, an increase in aggregate demand variance significantly lowers risk premiums. Macro risks also significantly predict future realized bond return variances.

Keywords: Bond return predictability; Term premium; Macroeconomic volatility; Business cycles; Macro risk factors (search for similar items in EconPapers)
JEL-codes: E31 E32 E43 E44 G12 G13 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (19)

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Related works:
Working Paper: Macro Risks and the Term Structure of Interest Rates (2017)
Working Paper: Macro Risks and the Term Structure of Interest Rates (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:141:y:2021:i:2:p:479-504

DOI: 10.1016/j.jfineco.2021.03.011

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