INFORMATION IN THE YIELD CURVE: A MACRO‐FINANCE APPROACH |
| |
| Authors: | Hans Dewachter Leonardo Iania Marco Lyrio |
| |
| Institution: | 1. National Bank of Belgium, Brussels, Belgium;2. Center for Economic Studies, University of Leuven, Belgium;3. CESifo, Munich, Germany;4. Louvain School of Management (UCL), Louvain‐la‐Neuve, Belgium;5. Insper Institute of Education and Research, S?o Paulo, Brazil |
| |
| Abstract: | We use a macro‐finance model, incorporating macroeconomic and financial factors, to study the term premium in the US 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. Copyright © 2012 John Wiley & Sons, Ltd. |
| |
| Keywords: | |
|
|
