Macroeconomic determinants of the yield curve
Macroeconomic variables besides inflation and real activity drive the
yield curve in the framework of no-arbitrage affine term structure
models. We construct model-based projection of all the latent factors
onto the observable macro factors, which are real activity and
inflation.
As a result, the factors are decomposed into the “macro” part: a
linear function of the macro variables and their lags; and the truly
novel part which is orthogonal to the entire history of the macro
variables. We are able to relate the unexplained part of the short
rate to such measures of liquidity as the AAA credit spread and MZM
growth rate. The unexplained part of the slope is highly correlated
with the budget deficit.
NO-ARBITRAGE MACROECONOMIC DETERMINANTS OF THE YIELD CURVE
Session Term Structure Models
Field Finance
Session Chair Ricardo Brito, Ibmec São Paulo
Presenter(s) Ruslan Bikbov, Columbia Business School
Co-Author(s) Mikhail Chernov, Columbia Business School
Topics Asset Pricing, Empirical Finance, Financial Econometrics and
State Space and Factor Models
Keywords Affine models, Credit Spread, dynamic no-arbitrage
models, Liquidity, Monetary policy, MZM money, Public debt, Taylor
Rules, Term Structure of Interest rates and Vector Auto Regression
JEL Codes E43, E44, G12