Macroeconomic Uncertainty and the Distant Forward-Rate Slope

Posted: 14 Mar 2014 Last revised: 26 Jul 2018

See all articles by Robert A. Connolly

Robert A. Connolly

University of Florida

David A. Dubofsky

University of Louisville - Department of Finance

Chris T. Stivers

University of Louisville

Date Written: February 6, 2018

Abstract

Over the 1990 to 2014 period, we show that the macroeconomic-uncertainty index of Jurado, Ludvigson, and Ng (2015) is a powerful empirical determinant of the slope in Treasury forward interest rates over the 10- to 30-year term-structure segment. The strong negative partial relation between macroeconomic uncertainty and the distant forward-rate slope remains reliably evident in a multivariate setting that includes expected bond yield volatility (as a control for convexity's influence), economic growth, expected inflation, and five other well-known uncertainty and risk measures. Beyond the well-known bond convexity channel for promoting a downward sloping distant forward-rate slope, our findings suggest that higher macroeconomic uncertainty can promote a more downward slope in distant forward rates through a hedge channel in the sense of Campbell, Sunderam, and Viceira (2017). Consistent with the hypothesized hedge channel, we also document striking cross-sectional variation in how bond returns are related to macroeconomic uncertainty, both across mid- and long-horizon T-bonds and across high and low credit-risk corporate bonds.

Keywords: Term Structure, Forward Interest Rates, Macroeconomic Risk, Term Risk Premia

JEL Classification: G12

Suggested Citation

Connolly, Robert A. and Dubofsky, David A. and Stivers, Chris T., Macroeconomic Uncertainty and the Distant Forward-Rate Slope (February 6, 2018). Journal of Empirical Finance, Vol. 48, pp. 140-161, 2018, Available at SSRN: https://ssrn.com/abstract=2408049 or http://dx.doi.org/10.2139/ssrn.2408049

Robert A. Connolly

University of Florida ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

David A. Dubofsky

University of Louisville - Department of Finance ( email )

PO BOX 844000
Louisville, KY 40292
United States
502-852-3016 (Phone)
502-852-6072 (Fax)

HOME PAGE: http://cobweb2.louisville.edu/profile/Dubofsky.html

Chris T. Stivers (Contact Author)

University of Louisville ( email )

Finance Dept., College of Business
University of Louisville
Louisville, KY 40292
United States
502-852-4829 (Phone)

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