Expectations and Risk Premia at 8:30am: Macroeconomic Announcements and the Yield Curve

54 Pages Posted: 16 Nov 2015

See all articles by Peter Hördahl

Peter Hördahl

Bank for International Settlements (BIS) - BIS Representative Office for Asia and the Pacific

Eli M. Remolona

Bank for International Settlements (BIS) - Monetary and Economic Department

Giorgio Valente

Hong Kong Institute for Monetary and Financial Research (HKIMR)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2015

Abstract

We investigate the movements of the yield curve after the release of major U.S. macroeconomic announcements through the lenses of an arbitrage-free dynamic term structure model with macroeconomic fundamentals. Combining estimated yield responses obtained using high-frequency data with model estimates using monthly data, we show that bond yields move after announcements mostly because of revisions to expectations about short-term interest rates. Changes in risk premia are also sizable, partly offset the effects of short-rate expectations and help to account for the hump-shaped pattern across maturities. Most announcement responses are due to changes in expectations about the output gap.

Keywords: Bond excess returns, term structure of interest rates, affine models, macroeconomic announcements

JEL Classification: G0, G1, E0, E4

Suggested Citation

Hoerdahl, Peter and Remolona, Eli M. and Valente, Giorgio, Expectations and Risk Premia at 8:30am: Macroeconomic Announcements and the Yield Curve (November 2015). BIS Working Paper No. 527. Available at SSRN: https://ssrn.com/abstract=2690373

Peter Hoerdahl (Contact Author)

Bank for International Settlements (BIS) - BIS Representative Office for Asia and the Pacific ( email )

78th floor, Two International Finance Centre
8 Finance Street, Central
Hong Kong

Eli M. Remolona

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

IFC 2 Bldg, 78/F
Central
Hong Kong
Hong Kong
+852 2982 7150 (Phone)
+852 2982 7123 (Fax)

Giorgio Valente

Hong Kong Institute for Monetary and Financial Research (HKIMR) ( email )

One Pacific Place, 10th Floor
88 Queensway
Hong Kong
China

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