Information in the yield curve: A Macro-Finance approach

Hans Dewachter, Leonardo Iania and Marco Lyrio ()

No 254, Working Paper Research from National Bank of Belgium

Abstract: We use a macro-finance model, incorporating macroeconomic and financial factors, to study the term premium in the U.S. 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.

Keywords: Macro-finance model; Yield curve; Expectations hypothesis (search for similar items in EconPapers)
JEL-codes: E43 E44 E47 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2014-03
New Economics Papers: this item is included in nep-for, nep-ger, nep-mac and nep-mon
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Citations: View citations in EconPapers (27)

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Related works:
Journal Article: 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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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:201403-254

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