Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/30714
Authors: 
Dewachter, Hans
Iania, Leonardo
Year of Publication: 
2010
Series/Report no.: 
CESifo Working Paper 2950
Abstract: 
This paper extends the benchmark Macro-Finance model by introducing, next to the standard macroeconomic factors, additional liquidity-related and return forecasting factors. Liquidity factors are obtained from a decomposition of the TED spread while the return-forecasting (risk premium) factor is extracted by imposing a single factor structure on the one-period expected excess holding returns. The model is estimated on US data using MCMC techniques. Two findings stand out. First, the model outperforms significantly most structural and non-structural Macro-Finance yield curve models in terms of cross-sectional fit of the yield curve. Second, we find that financial shocks, either in the form of liquidity or risk premium shocks, have a statistically and economically significant impact on the yield curve. The impact of financial shocks extends throughout the yield curve but is most pronounced at the high and intermediate frequencies.
Subjects: 
yield curve
affine models
macroeconomics and financial factors
Bayesian estimation
JEL: 
C11
E44
G12
Document Type: 
Working Paper

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