Abstract
Examining the relation between yields at different maturities is crucial for both macroeconomists and financial economists. From a macro-economic perspective, the short rate is the policy instrument under the control of the monetary authority; however, from a financial perspective, movements in short-term rates are analyzed to forecast longer yields’ dynamics, since yields on long-term bonds are the expected average of risk-adjusted future spot rates. Moreover, the dynamics of the term structure (TS) is influenced both by monetary policy actions and by expectations about policy announcements; while, on the other hand, economists infer the future path of macro variables from different shapes of the yield curve.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Ang, A., Bekaert, G., and Wei, M. (2008) “The Term Structure of Real Rates and Expected Inflation,” Journal of Finance, 63 (2): 797–849.
Ang, A. and Piazzesi, M. (2003) “A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables,” Journal of Monetary Economics, 50 (4): 745–787.
Ang, A., Piazzesi, M., and M. Wei. (2006) “What Does the Yield Curve Tell Us about GDP Growth?” Journal of Econometrics, 131 (1): 359–403.
Bekaert, G., Cho S., and Moreno, A. (2005) “New-Keynesian Macroeconomics and the Term Structure,” NBER Working Paper 11340, Cambridge, Massachusetts.
Bernanke, B. S. and Blinder, A. S. (1992) “The Federal Funds Rate and the Channel of Monetary Transmission,” American Economic Review, 82 (4): 901–921.
Bernanke, B. S. and Mihov, I. (1998) “Measuring Monetary Policy,” The Quarterly Journal of Economics, 113 (3): 869–902.
Campbell, J. Y. and Cochrane, J. H. (1999) “By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behaviour,” Journal of Political Economy, 107 (2): 205–251.
Chapman, D. A. (1997) “The Cyclical Properties of Consumption Growth and the Real Term Structure,” Journal of Monetary Economics, 39 (2): 145–172.
Cochrane, J. H. (2005) Asset Pricing, Princeton, NJ: Princeton University Press.
Cochrane, J. H. and Piazzesi, M. (2005) “Bond Risk Premia,” American Economic Review, 95 (1): 138–160.
Cox, J. C, Ingersoll, J. E., and Ross, S. A. (1985) “A Theory of the Term Structure of Interest Rates,” Econometrica, 53 (2): 385–408.
Dai, Q. and Singleton, K. J. (2000) “Specification Analysis of Affine Term Structure Models,” Journal of Finance, 55 (5): 1943–1978.
Dai, Q. and Singleton, K. J. (2001) “Expectations Puzzles, Time-Varying Risk Premia and Dynamic Models of the Term Structure,” Journal of Financial Economics, 63 (3): 415–441.
Dewachter, H. and Lyrio, M. (2002) “Macro Factors and the Term Structure of Interest Rates,” Working Paper, Catholic University of Leuven, Leuven.
Dewachter, H., Lyrio, M., and Maes, K. (2006) “A Joint Model for the Term Structure of Interest Rates and the Macroeconomy,” Journal of Applied Econometrics, 21 (4): 439–463.
Diebold, F. X. and Li, C. (2006) “Forecasting the Term Structure of Government Bond Yields,” Journal of Econometrics, 130 (2): 337–364.
Diebold, F. X., Piazzesi, M., and Rudebusch, G. D. (2005) “Modeling Bond Yields in Finance and Macroeconomics,” American Economic Review, 95 (2): 415–420.
Diebold, F. X., Rudebusch, G. D., and Aruoba, S. B. (2006) “The Macro-economy and the Yield Curve: A Dynamic Latent Factor Approach,” Journal of Econometrics, 131 (1): 309–338.
Duffee, G. R. (2002) “Term Premia and Interest Rate Forecasts in Affine Models,” Journal of Finance, 57 (1): 405–433.
Duffie, D. and Kan, R. (1996) “A Yield-Factor Model of Interest Rates,” Mathematical Finance, 6 (4): 379–406.
Durbin, J. and Koopman, S. J. (2001) Time Series Analysis by State Space Methods, Oxford: Oxford University Press.
Estrella, A. and Hardouvelis, G. A. (1991) “The Term Structure as a Predictor of Real Economic Activity,” Journal of Finance, 46 (2): 555–576.
Estrella, A. and Mishkin, F. S. (1997) “The Predictive Power of the Term Structure of Interest Rates in Europe and the United States: Implications for the European Central Bank,” European Economic Review, 41 (7): 1375–1401.
Evans, C. L. and Marshall, D. A. (2007) “Economic Determinants of the Nominal Treasury Yield Curve,” Journal of Monetary Economics, 54 (7): 1986–2003.
Fama, E. F. and Bliss, R. R. (1987) “The Information in Long Maturity Forward Rates,” American Economic Review, 77 (4): 680–692.
Favero, C. A. (2006) “Taylor Rules and the Term Structure,” Journal of Monetary Economics, 53 (7): 1377–1393.
Gallmeyer, M. F., Hollifield B., and Zin, S. E. (2005) “Taylor Rules, McCallum Rules and the Term Structure of Interest Rates,” Journal of Monetary Economics, 52 (5): 921–950.
Garcia, R. and Luger, R. (2007) “The Canadian Macroeconomy and the Yield Curve: An Equilibrium-Based Approach,” Canadian Journal of Economics, 40 (2): 561–583.
Hamilton, J. D. and Kim, D. H. (2002) “A Reexamination of the Predictability of Economic Activity Using the Yield Spread,” Journal of Money, Credit, and Banking, 34 (2): 340–360.
Harvey, C. R. (1988) “The Real Term Structure and Consumption Growth,” Journal of Financial Economics, 22(2): 305–333.
Hordahl, P., Tristani, O., and D. Vestin. (2006) “A Joint Econometric Model of Macroeconomic and Term Structure Dynamics,” Journal of Econometrics, 131 (1): 405–444.
Kim, C. J. and Nelson, C. R. (1999) State Space Models with Regime Switching, Cambridge, Mass.: MIT Press.
Litterman, R. and Scheinkman, J. (1991) “Common Factors Affecting Bond Returns,” Journal of Fixed Income, 1 (1): 54–61.
Nelson, C. R. and Siegel, A. F. (1987) “Parsimonious Modelling of Yield Curves,” Journal of Business, 60 (4): 473–489.
Nelson, C. R. and Siegel, A. F. (1988) “Long-Term Behaviour of Yield Curves,” Journal of Financial and Quantitative Analysis, 23 (1): 105–110.
Piazzesi, M. (2003) “Affine Term Structure Models,” in Y. Ait-Sahalia and L. P. Hansen (eds.), Handbook of Financial Econometrics, Princeton, NJ.
Rudebusch, G. D. (1995) “Federal Reserve Interest Rate Targeting, Rational Expectations, and the Term Structure,” Journal of Monetary Economics, 35 (2): 245–274.
Rudebusch, G. D. and Wu, T. (2007) “Accounting for a Shift in Term Structure Behavior with No-Arbitrage and Macro-Finance Models,” Journal of Money, Credit and Banking, 39 (2–3): 395–422.
Rudebusch, G. D. and Wu, T. (2008) “A Macro-Finance Model of the Term Structure, Monetary Policy, and the Economy,” Economic Journal, 118 (530): 906–926.
Singleton, K. J. (2006). Empirical Dynamic Asset Pricing. Model Specification and Econometric Assessment, Princeton, NJ: Princeton University Press.
Stock, J. H. and Watson, M. W. (1989) “New Indexes of Coincident and Leading Indicators,” in O. Blanchard and S. Fischer (eds.), NBER Macroeconomics Annual, vol. IV, Cambridge, Mass.: MIT Press.
Wachter, J. (2006) “A Consumption Based Model of the Term Structure of Interest Rates,” Journal of Financial Economics, 79 (2): 365–399.
Editor information
Editors and Affiliations
Copyright information
© 2011 Matteo Modena
About this chapter
Cite this chapter
Modena, M. (2011). A Macroeconomic Analysis of the Latent Factors of the Yield Curve: Curvature and Real Activity. In: Gregoriou, G.N., Pascalau, R. (eds) Financial Econometrics Modeling: Derivatives Pricing, Hedge Funds and Term Structure Models. Palgrave Macmillan, London. https://doi.org/10.1057/9780230295209_7
Download citation
DOI: https://doi.org/10.1057/9780230295209_7
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-32892-5
Online ISBN: 978-0-230-29520-9
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)