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Treasuries variance decomposition and the impact of monetary policy
Author(s) -
Kontonikas Alexandros,
Nolan Charles,
Zekaite Zivile,
Lamla Michael
Publication year - 2019
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1744
Subject(s) - monetary policy , economics , variance decomposition of forecast errors , inflation (cosmology) , monetary economics , inflation targeting , variance (accounting) , interest rate , econometrics , physics , accounting , theoretical physics
This paper investigates the effect of monetary policy shifts on Treasuries over the last three decades. We decompose unexpected excess returns on 2‐, 5‐, and 10‐year Treasuries in three components related to revisions in expectations (news) about future excess returns, inflation, and real interest rates. We evaluate the impact of conventional and unconventional monetary policy shocks on returns and their components. Our results indicate that expansionary monetary policy shocks are associated with declining inflation expectations and higher Treasuries' returns.