Deconstructing the Yield Curve

67 Pages Posted: 10 Apr 2019 Last revised: 16 May 2019

See all articles by Richard K. Crump

Richard K. Crump

Federal Reserve Banks - Federal Reserve Bank of New York

Nikolay Gospodinov

Federal Reserve Bank of Atlanta

Date Written: April 1, 2019


We investigate the factor structure of the term structure of interest rates and argue that characterizing the minimal dimension of the data-generating process is more challenging than currently appreciated. To circumvent these difficulties, we introduce a novel nonparametric bootstrap that is robust to general forms of time and cross-sectional dependence and conditional heteroskedasticity of unknown form. We show that our bootstrap procedure is asymptotically valid and exhibits excellent finite-sample properties in simulations. We demonstrate the applicability of our results in two empirical exercises: First, we show that measures of equity market tail risk and the state of the macroeconomy predict bond returns beyond the level or slope of the yield curve; second, we provide a bootstrap-based bias correction and confidence intervals for the probability of recession based on the shape of the yield curve. Our results apply more generally to all assets with a finite maturity structure.

Keywords: term structure of interest rates, factor models, principal components, bond risk premiums, resampling-based inference

JEL Classification: C15, C58, G10, G12

Suggested Citation

Crump, Richard K. and Gospodinov, Nikolay, Deconstructing the Yield Curve (April 1, 2019). FRB of New York Staff Report No. 884. Available at SSRN: or

Richard K. Crump (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Nikolay Gospodinov

Federal Reserve Bank of Atlanta ( email )

Atlanta, GA 30309
United States


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