Level, Slope, Curvature: Characterising the Yield Curve in a Cointegrated VAR Model

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may Abstract:Empirical evidence on the expectations hypothesis of the term structure is in-conclusive and its validity widely debated. Using a cointegrated VAR model of US treasury yields, this paper extends a common approach to test the theory. If, as we find, spreads between two yields are non-stationary, the expectations hypothesis fails. However, we present evidence that differences between two spreads are stationary. This suggests that the curvature of the yield curve may be a more meaningful indicator of expected future interest rates than the slope. Furthermore, we characterise level and slope by deriving the common trends inherent in the cointegrated VAR, and establish feedback patterns between them and the macroeconomy. JEL: C32, E43, E44

The Long Swings Puzzle: What the Data Tell When Allowed to Speak Freely

“…They also report additional …ndings that point to the importance of in-‡ationary expectations measured by the term spread (R s i R l i ); which was found to be empirically I(1): The latter …nding, again, points to the importance of allowing for not just one, but at least two, stochastic trends in the term structure of interest rates (Giese, 2008), and thus to a reconsideration of the monetary policy interest rate channel.…”

Measuring monetary policy and its impact on the bond market of an emerging economy

“…Furthermore, monetary policy tightening has a significant impact on credit spreads over the medium term implying that the market demands greater risk premia during policy tightening thereby indicating a distinct preference for safe assets. 19 Thus, given the persistence of chronic fiscal deficits and the RBI's dual role as the monetary authority and the debt manager, the results show that the bond market is responsive to policy signals from the central bank. These findings throw some insights on the modus operandi of further developing the Indian bond market.…”

“…In other words, the impact on the 5-year yields is not as strong as the impact on the short and long end of the yield curve implying that the yield curve becomes more convex (less 'hump-shaped') in response to monetary policy tightening. 15 The change in curvature also reflects shifting market perceptions about yield curve dynamics where expectations of yields of the short and long term dominate that of the medium term (Giese, 2008).…”

“…For instance, while changes in the market's perception of the inflation target shifts the level of the yield curve in inflation targeting regimes, monetary policy shocks lead to a decline in its slope (Diebold et al, 2006;Rudebusch and Wu, 2008). Moreover, curvature changes occur when market participants revise their expectation on yields of different maturities (Giese, 2008). In these models, while the inflation target shock is found to account for most of the variation in the level, the monetary policy shocks dominate the variations in slope and curvature (Bekaert et al, 2010).…”

The Analysis of Nonstationary Time Series Using Regression, Correlation and Cointegration

“…A more thorough analysis of these data is given in Giese (2008) who also give the references to earlier analyses.…”