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Accounting for a Shift in Term Structure Behavior with No‐Arbitrage and Macro‐Finance Models
Author(s) -
RUDEBUSCH GLENN D.,
WU TAO
Publication year - 2007
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.0022-2879.2007.00030.x
Subject(s) - affine term structure model , yield curve , arbitrage , term (time) , economics , macro , inflation (cosmology) , econometrics , interest rate , regime shift , financial economics , monetary economics , computer science , physics , ecology , programming language , quantum mechanics , ecosystem , theoretical physics , biology
This paper examines a shift in the dynamics of the term structure of interest rates in the United States during the mid‐1980s. We document this shift using standard interest rate regressions and using dynamic, affine, no‐arbitrage models estimated for the pre‐ and post‐shift subsamples. The term structure shift largely appears to be the result of changes in the pricing of risk associated with a “level” factor. Using a macro‐finance model, we suggest a link between this shift in term structure behavior and changes in the dynamics and risk pricing of the Federal Reserve's inflation target as perceived by investors.