Information in the Yield Curve: A Macro-Finance Approach
61 Pages Posted: 24 Mar 2013
Date Written: March 23, 2013
We use a macro- finance model incorporating macroeconomic and financial factors to study the term premium in the U.S. bond market. Estimating the model using Bayesian techniques, we find that one factor is responsible for most of the variation in bond premia. Furthermore, the model-implied bond premia explain 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.
Keywords: Macro-fi nance model, Term structure, Forecasting
JEL Classification: E43, E44, E47
Suggested Citation: Suggested Citation