Economic Policy Uncertainty and the Yield Curve

Swiss Finance Institute Research Paper No. 22-36

Forthcoming, Review of Finance

58 Pages Posted: 7 Oct 2015 Last revised: 27 Apr 2022

See all articles by Markus Leippold

Markus Leippold

University of Zurich; Swiss Finance Institute

Felix Matthys


Date Written: April 25, 2022


We study the impact of economic policy uncertainty on the term structure of nominal interest rates. In a general equilibrium model populated by an uncertainty-averse agent, we show that political uncertainty not only affects the yield curve and the corresponding volatility term structure but also bond risk premia carry a premium for political uncertainty. Our model simultaneously captures both the shape of the yield curve and the hump shape of yield volatilities, a stylized feature that is hard to match with a theoretical model. Our model gives rise to a set of testable predictions for which we find strong support in the data: Higher policy uncertainty leads to a significant decline in yield levels and increases bond yield volatilities. Moreover, policy uncertainty predicts future short rates and has an ambiguous effect on term premia. Finally, short (long) maturity bond risk premia respond negatively (positively) to increases in policy uncertainty.

Keywords: Term structure, yield volatility curve, hump-shaped volatility, policy uncertainty, bond risk premia

JEL Classification: G01, G12, G14, G18

Suggested Citation

Leippold, Markus and Matthys, Felix, Economic Policy Uncertainty and the Yield Curve (April 25, 2022). Swiss Finance Institute Research Paper No. 22-36, Forthcoming, Review of Finance, Available at SSRN: or

Markus Leippold

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

Felix Matthys (Contact Author)

ITAM ( email )

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

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