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504
A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables
, 2002
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Term Premia and Interest Rate Forecasts in Affine Models
, 2001
"... I find that the standard class of a#ne models produces poor forecasts of future changes in Treasury yields. Better forecasts are generated by assuming that yields follow random walks. The failure of these models is driven by one of their key features: The compensation that investors receive for faci ..."
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Cited by 454 (13 self)
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I find that the standard class of a#ne models produces poor forecasts of future changes in Treasury yields. Better forecasts are generated by assuming that yields follow random walks. The failure of these models is driven by one of their key features: The compensation that investors receive for facing risk is a multiple of the variance of the risk. This means that risk compensation cannot vary independently of interest rate volatility. I also describe and empirically estimate a class of models that is broader than the standard a#ne class. These "essentially a#ne" models retain the tractability of the usual models, but allow the compensation for interest rate risk to vary independently of interest rate volatility. This additional flexibility proves useful in forming accurate forecasts of future yields. Address correspondence to the University of California, Haas School of Business, 545 Student Services Building #1900, Berkeley, CA 94720. Phone: 510-642-1435. Email address: du#ee@haas.b...
What moves the stock and bond markets? A variance decomposition for long-term asset returns
, 1991
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What does the Yield Curve Tell us about GDP Growth?
, 2003
"... A lot, including a few things you may not expect. Previous studies find that the term spread forecasts GDP but these regressions are unconstrained and do not model regressor endogeneity. We build a dynamic model for GDP growth and yields that completely characterizes expectations of GDP. The model d ..."
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Cited by 193 (7 self)
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A lot, including a few things you may not expect. Previous studies find that the term spread forecasts GDP but these regressions are unconstrained and do not model regressor endogeneity. We build a dynamic model for GDP growth and yields that completely characterizes expectations of GDP. The model does not permit arbitrage. Contrary to previous findings, we predict that the short rate has more predictive power than any term spread. We confirm this finding by forecasting GDP out-of-sample. The model also recommends the use of lagged GDP and the longest maturity yield to measure slope. Greater efficiency enables the yield-curve model to produce superior out-of-sample GDP forecasts than unconstrained OLS at all horizons.
Variable Rare Disasters: An Exactly Solved Framework for
- Ten Puzzles in Macro Finance, Working Paper, NYU
, 2009
"... This article incorporates a time-varying severity of disasters into the hy- ..."
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Cited by 163 (10 self)
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This article incorporates a time-varying severity of disasters into the hy-
Expectation puzzles, time-varying risk premia, and affine models of the term structure
- Journal of Financial Economics
, 2002
"... Though linear projections of returns on the slope of the yield curve have contradicted the implications of the traditional “expectations theory, ” we show that these findings are not puzzling relative to a large class of richer dynamic term structure models. Specifically, we are able to match all of ..."
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Cited by 148 (18 self)
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Though linear projections of returns on the slope of the yield curve have contradicted the implications of the traditional “expectations theory, ” we show that these findings are not puzzling relative to a large class of richer dynamic term structure models. Specifically, we are able to match all of the key empirical findings reported by Fama and Bliss and Campbell and Shiller, among others, within large subclasses of affine and quadratic-Gaussian term structure models. Additionally, we show that certain “risk-premium adjusted ” projections of changes in yields on the slope of the yield curve recover the coefficients of unity predicted by the models. Key to this matching are parameterizations of the market prices of risk that let the risk factors affect the market prices of risk directly, and not only through the factor volatilities. The risk premiums have a simple form consistent with Fama’s findings on the predictability of forward rates, and are also shown to be consistent with interest rate, feedback rules used by a monetary authority in setting monetary policy.
The macroeconomy and the yield curve: a dynamic latent factor approach
- Journal of Econometrics
, 2006
"... Abstract: We estimate a model that summarizes the yield curve using latent factors (specifically, level, slope, and curvature) and also includes observable macroeconomic variables (specifically, real activity, inflation, and the monetary policy instrument). Our goal is to provide a characterization ..."
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Cited by 145 (15 self)
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Abstract: We estimate a model that summarizes the yield curve using latent factors (specifically, level, slope, and curvature) and also includes observable macroeconomic variables (specifically, real activity, inflation, and the monetary policy instrument). Our goal is to provide a characterization of the dynamic interactions between the macroeconomy and the yield curve. We find strong evidence of the effects of macro variables on future movements in the yield curve and evidence for a reverse influence as well. We also relate our results to the expectations hypothesis.
New Techniques to Extract Market Expectations from Financial Instruments
- Journal of Monetary Economics
, 1997
"... Central banks have several reasons for extracting information from asset prices. Asset prices may embody more accurate and more up-to-date macroeconomic data than what is currently published or directly available to policy makers. Aberrations in some asset prices may indicate ..."
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Cited by 145 (4 self)
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Central banks have several reasons for extracting information from asset prices. Asset prices may embody more accurate and more up-to-date macroeconomic data than what is currently published or directly available to policy makers. Aberrations in some asset prices may indicate
A Consumption-Based Model of the Term Structure of Interest Rates
, 2004
"... This paper proposes a consumption-based model that can account for many features of the nominal term structure of interest rates. The driving force behind the model is a time-varying price of risk generated by external habit. Nominal bonds depend on past consumption growth through habit and on expec ..."
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Cited by 143 (9 self)
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This paper proposes a consumption-based model that can account for many features of the nominal term structure of interest rates. The driving force behind the model is a time-varying price of risk generated by external habit. Nominal bonds depend on past consumption growth through habit and on expected inflation. When calibrated to data on consumption, inflation, and the average level of bond yields, the model produces realistic volatility of bond yields and can explain key aspects of the expectations puzzle documented by Campbell and Shiller (1991) and Fama and Bliss (1987). When actual consumption and inflation data are fed into the model, the model is shown to account for many of the short and long-run fluctuations in the short-term interest rate and the yield spread. At the same time, the model captures the high equity premium and
Exchange Rates and Monetary Fundamentals: What Do We Learn From Long–Horizon Regressions
- Journal of Applied Econometrics
, 1999
"... Abstract: Long-horizon regression tests are widely used in empirical finance, despite evidence of severe size distortions. I propose a new bootstrap method for small-sample inference in long-horizon regressions. A Monte Carlo study shows that this bootstrap test greatly reduces the size distortions ..."
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Cited by 141 (11 self)
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Abstract: Long-horizon regression tests are widely used in empirical finance, despite evidence of severe size distortions. I propose a new bootstrap method for small-sample inference in long-horizon regressions. A Monte Carlo study shows that this bootstrap test greatly reduces the size distortions of conventional long-horizon regression tests. I also find that long-horizon regression tests do not have power advantages against economically plausible alternatives. The apparent lack of higher power at long horizons suggests that previous findings of increasing long-horizon predictability are more likely due to size distortions than to power gains. I illustrate the use of the bootstrap method by analyzing whether monetary fundamentals help predict changes in four major exchange rates. In contrast to earlier studies, I find only weak evidence of exchange rate predictability and no evidence of increasing long-horizon predictability. Many of the differences in results can be traced to the implementation of the test.
