Finance models of the term structure of interest rates have for a long time relied on unobserved factors as explanatory variables. In a seminal paper, Ang and Piazzesi (2003) have examined the potential role of macroeconomic variables in explaining the term structure. They, and subsequent...

Have interest rates been held “too low†in relation to the natural rate of interest? Economists have lately begun to worry that the cost of capital may have fallen below the worldwide expected return on capital, thereby causing excessive borrowing and allowing financial imbalances to...

We study how well a New Keynesian business cycle model can explain the observed behavior of nominal interest rates. We focus on two puzzles raised in previous literature. First, Donaldson, Johnsen, and Mehra (1990) show that while in the U.S. nominal term structure the interest rates are...

This paper asks the question of whether the newly available TIPS yields data can help us achieve a better understanding of the real term structure and the inflation expectations. The yield differential between TIPS and comparable nominal coupon securities is not a direct measure of inflation...

Recent studies by Dai and Singleton (2002), Duffee (2002), and Duarte (2004) show that affine term structure models that match the time variability of the expected returns of bond yields do not generate time variation in the volatility of interest rates. This failure indicates that affine models...

We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We test whether these effects are adequately captured by a single factor—changes in the federal funds rate target—and find that they are not. Instead, we find that two...

Data in which each observation is a curve occur in many applied problems. This paper explores prediction in time series in which the data is generated by a curve-valued autoregression process. It develops a novel technique, the predictive factor decomposition, for estimation of the...

Based on an idea in Backus, Foresi, and Telmer (1998) we extend the class of discrete-time affine multifactor Gaussian models by allowing factor innovations to be distributed as Gaussian mixtures. This is motivated by the observation that bond yield changes for some maturities are distinctly...

We document that the expectations puzzle characterising US yield data is strikingly dependent on the monetary policy regime. We then estimate an affine term-structure model built on a parsimonious macroeconomic setup over the 1970-2001 sample. The model allows us to relate deviations from the...

To date the cointegrating properties and the regime-switching behavior of the term structure are two separate strands of the literature. This paper integrates these lines of research and introduces regime shifts into a cointegrated VAR model. We argue that the short run dynamics of the...