Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset: Comment

Bauer, Michael D.; Rudebusch, Glenn D.; Wu, Jing Cynthia

doi:10.1257/aer.104.1.323

Cited by 111 publications

(93 citation statements)

References 23 publications

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“…Therefore, this approach is also based on the I(0)/I(1) dichotomy, not taking into account fractional alternatives. Interestingly, and despite the clear methodological differences, our estimated term premium displays quite similar countercyclical dynamics to the ones derived by Jardet, Monfort, andPegoraro (2011) andWu (2012a).…”

supporting

confidence: 74%

Term Structure Persistence

Abbritti¹,

Gil-Alana²,

Lovcha³

et al. 2015

JOURNAL OF FINANCIAL ECONOMETRICS

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Stationary I(0) models employed in yield curve analysis typically imply an unrealistically low degree of volatility in long-run short-rate expectations due to fast mean reversion. In this paper we propose a novel multivariate affine term structure model with a two-fold source of persistence in the yield curve: Long-memory and short-memory. Our model, based on an I(d) specification, nests the I(0) and I(1) models as special cases and the I(0) model is decisively rejected by the data. Our model estimates imply both mean reversion in yields and quite volatile long-distance short-rate expectations, due to the higher persistence imparted by the long-memory component. Our implied term premium estimates differ from those of the I(0) model during some relevant periods by more than 4 percentage points and exhibit a realistic countercyclical pattern. Mirko Abbritti AbstractStationary I(0) models employed in yield curve analysis typically imply an unrealistically low degree of volatility in long-run short-rate expectations due to fast mean reversion. In this paper we propose a novel multivariate affine term structure model with a two-fold source of persistence in the yield curve: Long-memory and short-memory. Our model, based on an I(d) specification, nests the I(0) and I(1) models as special cases and the I(0) model is decisively rejected by the data. Our model estimates imply both mean reversion in yields and quite volatile long-distance short-rate expectations, due to the higher persistence imparted by the long-memory component. Our implied term premium estimates differ from those of the I(0) model during some relevant periods by more than 4 percentage points and exhibit a realistic countercyclical pattern.JEL Classification: C3, E4, G1

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supporting

confidence: 74%

Term Structure Persistence

Abbritti¹,

Gil-Alana²,

Lovcha³

et al. 2015

JOURNAL OF FINANCIAL ECONOMETRICS

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“…Therefore, the term premium, as the residual component, has to account for the trend in the long-term interest rate since the 1980s. As argued by Kim and Orphanides (2012) and Bauer et al (2014), such behavior of expectations and term premium components appears at odds with observed trends in survey-based expectations (Kozicki and Tinsley, 2001) and the cyclical behavior of risk premiums in asset prices (Fama and French, 1989).…”

Section: The Term Premium In Long-term Yieldsmentioning

confidence: 91%

“…The resulting empirical decomposition of long-term rates into expectations and term premium components starkly contrasts with that from a conventional yield-curve model in which yield factors follow a stationary VAR(1). The conventional decomposition implies an implausibly stable expectations component and attributes most of the secular decline in interest rates to the residual term premium, as discussed in critiques by Kim and Orphanides (2012) and Bauer et al (2014). Our decomposition instead attributes the majority of the secular decline to the decrease in i * t .…”

mentioning

confidence: 91%

Interest Rates Under Falling Stars

Bauer

Rudebusch

2019

ERWP

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While theory predicts that the equilibrium real interest rate, r * t , and the perceived trend in inflation, π * t , are fundamental determinants of the yield curve, macro-finance models generally treat them as constant. We show that accounting for time-varying macro trends is critical for understanding the empirical dynamics of U.S. Treasury yields and risk pricing. It fundamentally changes estimated risk premiums in long-term bond yields, leads to large gains in predictions of excess bond returns and long-range out-of-sample forecasts of interest rates, and captures a substantial share of interest rate variability at low frequencies.

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“…To address this problem, one can take advantage of the information in the cross section of interest rates with plausible restrictions on risk pricing, as in Bauer (2016) and JPS, or directly adjust for the small-sample bias, as in Bauer et al (2012).…”

Section: Empirical Spanned and Unspanned Mtsmsmentioning

confidence: 99%

“…Overall, unspanned models may be a useful shortcut in practical applications of MTSMs. 42 We emphasize, however, that these models are not needed to match the regression evidence that is usually cited to justify their use and 40 Bauer et al (2012) and Bauer et al (2014) also discuss the countercyclical behavior of term premia estimated from term structure models.…”

Section: Term Premia In Spanned and Unspanned Mtsmsmentioning

confidence: 99%

Resolving the Spanning Puzzle in Macro-Finance Term Structure Models*

Bauer

Rudebusch

2016

Review of Finance

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Most existing macro-finance term structure models (MTSMs) appear incompatible with regression evidence of unspanned macro risk. This "spanning puzzle" appears to invalidate those models in favor of new unspanned MTSMs. However, our empirical analysis supports the previous spanned models. Using simulations to investigate the spanning implications of MTSMs, we show that a canonical spanned model is consistent with the regression evidence; thus, we resolve the spanning puzzle. In addition, direct likelihoodratio tests find that the knife-edge restrictions of unspanned models are rejected with high statistical significance, though these restrictions have only small effects on crosssectional fit and estimated term premia.

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Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset: Comment

Cited by 111 publications

References 23 publications

Term Structure Persistence

Term Structure Persistence

Interest Rates Under Falling Stars

Resolving the Spanning Puzzle in Macro-Finance Term Structure Models*

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