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Decomposing the Yield Curve

Monika Piazzesi and John Cochrane
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Monika Piazzesi: Stanford University

No 18, 2009 Meeting Papers from Society for Economic Dynamics

Abstract: We construct an affine model that incorporates bond risk premia. By understanding risk premia, we are able to use a lot of information from well-measured risk-neutral dyanmics to characterize real expectations. We use the model to decompose the yield curve into expected interest rate and risk premium components. We characterize the interesting term structure of risk premia -- a forward rate reflects expected excess returns many years into the future, and current slope and curvature factors forecast future expected returns even though they do not forecast current returns.

Date: 2009
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Citations: View citations in EconPapers (35)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed009:18

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More papers in 2009 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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