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Explaining Bond Return Predictability in an Estimated New Keynesian Model

Martin M. Andreasen ()
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Martin M. Andreasen: University of Aarhus and CREATES, Postal: Department of Economics and Business Economics, University of Aarhus, Fuglesangs Allé 4, Building 2632, 212, 8210 Aarhus V, DK

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This paper estimates a New Keynesian model that explains key macro series, the ten-year nominal yield curve, and the ability of the spread between long- and short-term bond yields to predict future excess bond returns. The model also generates an upward sloping nominal and real yield curve, produces a positive inflation risk premium, and recovers the prediction by the expectations hypothesis of no return predictability when historical bond yields are risk-adjusted using term premia from the proposed model. Key to obtaining these results is a new specification of stochastic volatility that allows high current inflation to generate high future uncertainty.

Keywords: Bond return predictability; Term premia; Robust structural estimation; Stochastic volatility (search for similar items in EconPapers)
JEL-codes: E44 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2019-05-22
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2019-11

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