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

See all articles by Gildas Lame

Gildas Lame

French Ministry of Finance

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

Lame, Gildas, Was There a 'Greenspan Conundrum' in the Euro Area? (September 23, 2013). INSEE Working Paper n°G2013/10, Available at SSRN: https://ssrn.com/abstract=2243372 or http://dx.doi.org/10.2139/ssrn.2243372

Gildas Lame (Contact Author)

French Ministry of Finance ( email )

France

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