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Expected Inflation and Other Determinants of Treasury Yields
Author(s) -
DUFFEE GREGORY R.
Publication year - 2018
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12700
Subject(s) - treasury , economics , bond , inflation (cosmology) , econometrics , yield (engineering) , variance (accounting) , risk premium , maturity (psychological) , monetary economics , physics , finance , psychology , developmental psychology , accounting , archaeology , theoretical physics , history , thermodynamics
Shocks to nominal bond yields consist of news about expected future inflation, expected future real short rates, and expected excess returns—all over the bond's life. I estimate the magnitude of the first component for short‐ and long‐maturity Treasury bonds. At a quarterly frequency, variances of news about expected inflation account for between 10% to 20% of variances of yield shocks. Standard dynamic models with long‐run risk imply variance ratios close to 1. Habit formation models fare somewhat better. The magnitudes of shocks to real rates and expected excess returns cannot be determined reliably.