An Econometric Model of the Yield Curve with Macroeconomic Jump Effects

Monika Piazzesi

No 8246, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops an arbitrage-free time-series model of yields in continuous time that incorporates central bank policy. Policy-related events, such as FOMC meetings and releases of macroeconomic news the Fed cares about, are modeled as jumps. The model introduces a class of linear-quadratic jump-diffusions as state variables, which allows for a wide variety of jump types but still leads to tractable solutions for bond prices. I estimate a version of this model with U.S. interest rates, the Federal Reserve's target rate, and key macroeconomic aggregates. The estimated model improves bond pricing, especially at short maturities. The snake-shape' of the volatility curve is linked to monetary policy inertia. A new monetary policy shock series is obtained by assuming that the Fed reacts to information available right before the FOMC meeting. According to the estimated policy rule, the Fed is mainly reacting to information contained in the yield-curve. Surprises in analyst forecasts turn out to be merely temporary components of macro variables, so that the hump-shaped' yield response to these surprises is not consistent with a Taylor-type policy rule.

JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 2001-04
Note: AP ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (62)

Downloads: (external link)
http://www.nber.org/papers/w8246.pdf (application/pdf)

Related works:
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:nbr:nberwo:8246

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w8246

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by (wpc@nber.org).