Information in the Yield Curve: A Macro-Finance Approach

National Bank of Belgium Working Paper No. 254

34 Pages Posted: 2 Apr 2014

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

Marco Lyrio

Insper Institute of Education and Research

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2014

Abstract

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

Dewachter, Hans and Iania, Leonardo and Lyrio, Marco, Information in the Yield Curve: A Macro-Finance Approach (April 1, 2014). National Bank of Belgium Working Paper No. 254, Available at SSRN: https://ssrn.com/abstract=2418957

Hans Dewachter

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

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

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Leonardo Iania (Contact Author)

Université catholique de Louvain ( email )

34, Voie du roman pays
louvain la neuve, 1348
Belgium

HOME PAGE: http://https://sites.google.com/site/ianialeonardo/

Marco Lyrio

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

HOME PAGE: http://www.insper.edu.br/en/faculty-and-research/marco-lyrio

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