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Macro‐finance VARs and bond risk premia: A caveat
Author(s) -
Taboga Marco
Publication year - 2009
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2009.06.002
Subject(s) - economics , macro , bond , term (time) , risk premium , arbitrage , financial economics , monetary economics , finance , physics , quantum mechanics , computer science , programming language
At the turn of the century, US and euro area long‐term bond yields experienced a remarkable decline and remained at historically low levels despite rising short‐term rates (the so called “conundrum”). Estimating macro‐finance VARs and no‐arbitrage term structure models, many researchers find that the decline in long‐term rates was primarily driven by an unprecedented reduction in risk premia. I show that this result might be an artefact of the class of models employed to study the phenomenon.