INFORMATION IN THE YIELD CURVE: A MACRO‐FINANCE APPROACH

Hans Dewachter, Leonardo Iania and Marco Lyrio ()

Journal of Applied Econometrics, 2014, vol. 29, issue 1, 42-64

Abstract: SUMMARY We use a macro‐finance model, incorporating macroeconomic and financial factors, to study the term premium in the US bond market. Estimating the model using Bayesian techniques, we find that a single factor explains most of the variation in bond risk premiums. Furthermore, the model‐implied risk premiums account for up to 40% of the variability of one‐ and two‐year excess returns. Using the model to decompose yield spreads into an expectations and a term premium component, we find that, although this decomposition does not seem important to forecast economic activity, it is crucial to forecast inflation for most forecasting horizons. Copyright © 2012 John Wiley & Sons, Ltd.

Date: 2014
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Related works:
Working Paper: Information in the yield curve: A macro-finance approach (2014)
Working Paper: Information in the yield curve: A Macro-Finance approach (2014)
Working Paper: Information in the Yield Curve: A Macro-Finance Approach (2011)
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