Expectations, Bond Yields, and Monetary Policy
Albert Chun
The Review of Financial Studies, 2011, vol. 24, issue 1, 208-247
Abstract:
Through explicitly incorporating analysts' forecasts as observable factors in a dynamic arbitrage-free model of the yield curve, this research proposes a framework for studying the impact of shifts in market sentiment on interest rates of all maturities. An empirical examination reveals that survey expectations about inflation, output growth, and the anticipated path of monetary policy actions contain important information for explaining movements in bond yields. Estimates from a forward-looking monetary policy rule suggest that the central bank exhibits a preemptive response to inflationary expectations while accommodating output growth and monetary policy expectations. Forecasted GDP growth plays a significant role in explaining time variation in the market prices of risk. The sensitivity of long yields is linked to the persistence of expected inflation under the risk-neutral measure. Models of this type may provide traders and policymakers with a new set of tools for formally assessing the reaction of bond yields to shifts in market expectations. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.
Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (52)
Downloads: (external link)
http://hdl.handle.net/10.1093/rfs/hhq090 (application/pdf)
Access to full text is restricted to subscribers.
Related works:
Working Paper: Expectations, Bond Yields and Monetary Policy (2010)
Working Paper: Expectations, Bond Yields and Monetary Policy (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:oup:rfinst:v:24:y:2011:i:1:p:208-247
Ordering information: This journal article can be ordered from
https://academic.oup.com/journals
Access Statistics for this article
The Review of Financial Studies is currently edited by Itay Goldstein
More articles in The Review of Financial Studies from Society for Financial Studies Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press (joanna.bergh@oup.com).