An Extended Macro-Finance Model with Financial Factors

58 Pages Posted: 2 Oct 2009 Last revised: 2 Sep 2012

See all articles by Hans Dewachter

Hans Dewachter

Catholic University of Leuven (KUL) - Department of Economics; Erasmus Research Institute of Management (ERIM)

Leonardo Iania

Université catholique de Louvain

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2009


This paper extends the benchmark Macro-Finance model by introducing, next to the standard macroeconomic factors, additional liquidity-related and return forecasting factors. Liquidity factors are obtained from a decomposition of the TED spread while the return-forecasting (risk premium) factor is extracted by imposing a single factor structure on the one-period expected excess holding returns. The model is estimated on US data using MCMC techniques. Two findings stand out. First, the model outperforms significantly most structural and non-structural Macro-Finance yield curve models in terms of cross-sectional fit of the yield curve. Second, we find that financial shocks, either in the form of liquidity or risk premium shocks, have a statistically and economically significant impact on the yield curve. The impact of financial shocks extends throughout the yield curve but is most pronounced at the high and intermediate frequencies.

Keywords: Yield Curve, Affine Models, Macroeconomics and Financial Factors, Bayesian Estimaion

JEL Classification: C11, E44, G12

Suggested Citation

Dewachter, Hans and Iania, Leonardo, An Extended Macro-Finance Model with Financial Factors (November 1, 2009). Available at SSRN: or

Hans Dewachter

Catholic University of Leuven (KUL) - Department of Economics ( email )

Center for Economic Studies
Naamsestraat 69
Leuven, B-3000
+0032 16 326859 (Phone)
+0032 16 326796 (Fax)

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam

Leonardo Iania (Contact Author)

Université catholique de Louvain ( email )

34, Voie du roman pays
louvain la neuve, 1348

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