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A joint model for the term structure of interest rates and the macroeconomy
Author(s) -
Dewachter Hans,
Lyrio Marco,
Maes Konstantijn
Publication year - 2006
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.848
Subject(s) - unobservable , observable , yield curve , economics , econometrics , term (time) , interest rate , latent variable , macro , bond , affine term structure model , macroeconomics , mathematics , statistics , computer science , finance , physics , quantum mechanics , programming language
We present and estimate a continuous time term structure model that incorporates observable macroeconomic variables and latent variables with a clear macroeconomic interpretation. Our model is able to accurately describe the joint dynamics for US macroeconomic variables and the yield curve. However, the observable variables do not explain the long end of the term structure. Central tendencies of these macroeconomic variables do a much better job in this respect. These unobservable factors also play an important role in the description of the interest rate policy rule. Both observable and non‐observable factors determine the risk premia and hence bond excess holding returns. Copyright © 2006 John Wiley & Sons, Ltd.