Government Policy Uncertainty and the Yield Curve

59 Pages Posted: 24 Sep 2015 Last revised: 23 Aug 2017

See all articles by Markus Leippold

Markus Leippold

University of Zurich - Department of Banking and Finance; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Felix Matthys

ITAM

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Date Written: August 23, 2017

Abstract

We study the impact of economic policy uncertainty on the term structure of nominal interest rates. We develop a general equilibrium model, in which both the government and the central bank policy decisions are driven by uncertainty shocks. Our affine yield curve model captures both the shape of the interest rate term structure as well as the hump-shape of bond yield volatilities. Our theoretical predictions are strongly supported by the data. Higher economic policy uncertainty leads to a significant decline in yield levels, induces a hump-shaped increase in bond yield volatility, and increases bond risk premia, especially for longer maturities.

Keywords: Term structure modeling, yield volatility curve, policy uncertainty, bond risk premia

JEL Classification: G01, G12, G14, G18

Suggested Citation

Leippold, Markus and Matthys, Felix, Government Policy Uncertainty and the Yield Curve (August 23, 2017). Available at SSRN: https://ssrn.com/abstract=2664116 or http://dx.doi.org/10.2139/ssrn.2664116

Markus Leippold

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Felix Matthys (Contact Author)

ITAM ( email )

Av. Camino a Sta. Teresa 930
Col. Héroes de Padierna
Mexico City, D.F. 01000, Federal District 01080
Mexico
+52 155 1394 6562 (Phone)

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