Information in the yield curve: A macro-finance approach

Dewachter, Hans;Iania, Leonardo;Lyrio, Marco
(2014) Journal of Applied Econometrics — Vol. 29, n° 1, p. 42-64 (2014)

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Authors
  • Dewachter, HansNational Bank of Belgium
    Author
  • Iania, LeonardoUCLouvain
    Author
  • Lyrio, MarcoInsper Institute of Education and Research, São Paulo
    Author
Abstract
We use a macro-finance model, incorporating macroeconomic and financial factors, to study the term premium in the US bond market. Estimating the model using Bayesian techniques, we find that a single factor explains most of the variation in bond risk premiums. Furthermore, the model-implied risk premiums account for up to 40% of the variability of one- and two-year excess returns. Using the model to decompose yield spreads into an expectations and a term premium component, we find that, although this decomposition does not seem important to forecast economic activity, it is crucial to forecast inflation for most forecasting horizons. © 2012 John Wiley & Sons, Ltd.
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Dewachter, H., Iania, L., & Lyrio, M. (2014). Information in the yield curve: A macro-finance approach. Journal of Applied Econometrics, 29(1), 42-64. https://doi.org/10.1002/jae.2305 (Original work published 2014)