Was There a 'Greenspan Conundrum' in the Euro Area?
INSEE Working Paper n°G2013/10
55 Pages Posted: 5 Apr 2013 Last revised: 7 Oct 2013
Date Written: September 23, 2013
Abstract
This paper implements an affine term structure model that accommodates "unspanned" macro risks for the Euro area, i.e. distinct from yield-curve risks. I use an averaging-estimator approach to obtain a better estimation of the historical dynamics of the pricing factors, thus providing more accurate estimates of the term premium incorporated into the Eurozone's sovereign yield curve. I then look for episodes of the monetary cycle where long yields display a puzzling behavior vis-à-vis the short rate and its expected average path in contrast with the Expectation Hypothesis. The Euro-area bond market appears to have gone through its own "Greenspan conundrum" between January 1999 and August 2008. The term premium substantially contributed to these odd phenomena.
Keywords: Affine term structure models, Unspanned macro risks, Monetary policy, Expectation Hypothesis, Term Premium, Macroeconomy
JEL Classification: C51, E43, E44, E47, E52, G12
Suggested Citation: Suggested Citation