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Title:Information in (and not in) the term structure PDF Logo
Authors:Duffee, Gregory R.
Issue Date:2011
Series/Report no.:Working papers // the Johns Hopkins University, Department of Economics 577
Abstract:Standard approaches to building and estimating dynamic term structure models rely on the assumption that yields can serve as the factors. However, the assumption is neither theoretically necessary nor empirically supported. This paper documents that almost half of the variation in bond risk premia cannot be detected using the cross section of yields. Fluctuations in this hidden component have strong forecast power for both future short-term interest rates and excess bond returns. They are also negatively correlated with aggregate economic activity, but macroeconomic variables explain only a small fraction of variation in the hidden factor.
Document Type:Working Paper
Appears in Collections:Working Papers, Department of Economics, The Johns Hopkins University

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