No-arbitrage macroeconomic determinants of the yield curve

Ruslan Bikbov () and Mikhail Chernov

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Abstract: No-arbitrage macro-finance models use variance decompositions to gauge the extent of association between the macro variables and yields. We show that results generated by this approach are sensitive to the order of variables in the recursive identification scheme. In a four-factor model, one may obtain 18 different sets of answers out of 24 possible. We propose an alternative measure that is based on levels of macro variables as opposed to shocks. We account for the correlation between the macro and latent factors via projection of the latter onto the former. As a result, the association between macro variables and yields can be computed uniquely via an . Macro variables explain 80% of the variation in the short rate and 50% of the slope, and 54% to 68% of the term premia.

Keywords: C13; C22; G12; Macro-finance models; Term structure; Variance decomposition; Kalman filter (search for similar items in EconPapers)
Date: 2010-09-15
Note: View the original document on HAL open archive server: https://hal.science/hal-00732517
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Citations: View citations in EconPapers (61)

Published in Econometrics, 2010, 159 (1), pp.166. ⟨10.1016/j.jeconom.2010.05.004⟩

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Journal Article: No-arbitrage macroeconomic determinants of the yield curve (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00732517

DOI: 10.1016/j.jeconom.2010.05.004

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