Economic-state Variation in Uncertainty-Yield Dynamics
The Review of Asset Pricing Studies, Volume 11, March 2021, pp. 60-104.
Posted: 13 Aug 2018 Last revised: 12 Jun 2021
Date Written: December 1, 2020
We show there is a much stronger negative, dynamic relation between changes in economic uncertainty and Treasury yields over weaker economic times since at least 1990. We document this economic-state variation in uncertainty-yield dynamics for weekly and monthly change horizons, for nominal yields and real-yield proxies, for multiple economic-state identification methods, and for different economic uncertainty metrics. We present additional findings that suggest short-term fluctuations in precautionary-savings and consumption-smoothing forces are more impactful on interest rate dynamics during weaker economic times, especially relying on surveys of expected economic growth and inflation.
Keywords: Treasury yields, economic uncertainty, precautionary savings, consumption smoothing, risk aversion
JEL Classification: G11, G12
Suggested Citation: Suggested Citation