Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/144466
Authors: 
Dewachter, Hans
Iania, Leonardo
Lyrio, Marco
Year of Publication: 
2014
Series/Report no.: 
Working Paper Research 254
Abstract: 
We use a macro-finance model, incorporating macroeconomic and financial factors, to study the term premium in the U.S. 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.
Subjects: 
Macro-finance model
Yield curve
Expectations hypothesis
JEL: 
E43
E44
E47
Document Type: 
Working Paper

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