Information in the Yield Curve: A Macro-Finance Approach
National Bank of Belgium Working Paper No. 254
34 Pages Posted: 2 Apr 2014
Date Written: April 1, 2014
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 a single factor explains most of the variation in bond risk premiums. Furthermore, the model-implied risk premiums account for 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-finance model, Yield curve, Expectations hypothesis
JEL Classification: E43, E44, E47
Suggested Citation: Suggested Citation