Decomposing the Yield Curve

54 Pages Posted: 26 Jan 2009 Last revised: 19 Mar 2009

See all articles by John H. Cochrane

John H. Cochrane

Hoover Institution; National Bureau of Economic Research (NBER)

Monika Piazzesi

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: January 26, 2009

Abstract

We construct an affine model that incorporates bond risk premia. By understanding risk premia, we are able to use a lot of information from well-measured risk-neutral dynamics to characterize real expectations. We use the model to decompose the yield curve into expected interest rate and risk premium components. We characterize the interesting term structure of risk premia -- a forward rate reflects expected excess returns many years into the future, and current slope and curvature factors forecast future expected returns even though they do not forecast current returns.

Keywords: affine model, term structure

JEL Classification: E43

Suggested Citation

Cochrane, John H. and Piazzesi, Monika, Decomposing the Yield Curve (January 26, 2009). AFA 2010 Atlanta Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1333274 or http://dx.doi.org/10.2139/ssrn.1333274

John H. Cochrane (Contact Author)

Hoover Institution ( email )

Stanford, CA 94305-6010
United States
6507236708 (Phone)

HOME PAGE: http://faculty.chicagobooth.edu/john.cochrane/index.htm

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Monika Piazzesi

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-3199 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
2,513
Abstract Views
8,019
rank
6,790
PlumX Metrics