Information in the yield curve: a macro-finance approach

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.

Publication year:2014

BOF-keylabel:yes

IOF-keylabel:yes

BOF-publication weight:1

CSS-citation score:1

Authors:International

Authors from:Private, Higher Education

Accessibility:Open