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A joint model for the term structure of interest rates and the macroeconomy

✍ Scribed by Hans Dewachter; Marco Lyrio; Konstantijn Maes

Publisher
John Wiley and Sons
Year
2006
Tongue
English
Weight
334 KB
Volume
21
Category
Article
ISSN
0883-7252

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✦ Synopsis

Abstract

We present and estimate a continuous time term structure model that incorporates observable macroeconomic variables and latent variables with a clear macroeconomic interpretation. Our model is able to accurately describe the joint dynamics for US macroeconomic variables and the yield curve. However, the observable variables do not explain the long end of the term structure. Central tendencies of these macroeconomic variables do a much better job in this respect. These unobservable factors also play an important role in the description of the interest rate policy rule. Both observable and non‐observable factors determine the risk premia and hence bond excess holding returns. Copyright © 2006 John Wiley & Sons, Ltd.

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