Macro-finance VARs and bond risk premia: A caveat |
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Authors: | Marco Taboga |
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Affiliation: | Economic Outlook and Monetary Policy Department, Bank of Italy, Via Nazionale 91 00184, Roma, Italy |
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Abstract: | At the turn of the century, US and euro area long-term bond yields experienced a remarkable decline and remained at historically low levels despite rising short-term rates (the so called “conundrum”). Estimating macro-finance VARs and no-arbitrage term structure models, many researchers find that the decline in long-term rates was primarily driven by an unprecedented reduction in risk premia. I show that this result might be an artefact of the class of models employed to study the phenomenon. |
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Keywords: | G12 C32 |
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