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Expectations and Risk Premia at 8:30 a.m.: Deciphering the Responses of Bond Yields to Macroeconomic Announcements

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  • Peter Hördahl
  • Eli M. Remolona
  • Giorgio Valente

Abstract

What explains the sharp movements of the yield curve upon the release of major U.S. macroeconomic announcements? To answer this question, we estimate an arbitrage-free dynamic term structure model with macroeconomic fundamentals as risk factors. We assume that the yield curve reacts to announcements primarily because of the information they contain about the fundamentals of output, inflation, and the Fed’s inflation target. We model the updating process by linking the factor shocks to announcement surprises. Fitting this process to data on yield curve movements in 20-min event windows, we find that most major announcements, especially those about the labor market, are informative largely about the output gap rather than about inflation. The resulting changes in short-rate expectations account for the bulk of observed yield movements. But adjustments in risk premia are also sizable. In partly offsetting the effects of short-rate expectations, these adjustments help to account for the well-known hump-shaped pattern of yield reactions across maturities.

Suggested Citation

  • Peter Hördahl & Eli M. Remolona & Giorgio Valente, 2020. "Expectations and Risk Premia at 8:30 a.m.: Deciphering the Responses of Bond Yields to Macroeconomic Announcements," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 38(1), pages 27-42, January.
    • Handle: RePEc:taf:jnlbes:v:38:y:2020:i:1:p:27-42
    DOI: 10.1080/07350015.2018.1429278
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    Cited by:

    1. Lars Winkelmann & Wenying Yao, 2024. "Tests for Jumps in Yield Spreads," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 42(3), pages 946-957, July.
    2. Annika Camehl & Tomasz Wo'zniak, 2023. "Time-Varying Identification of Monetary Policy Shocks," Papers 2311.05883, arXiv.org, revised May 2024.
    3. Bingxin Ann Xing & Bruno Feunou & Morvan Nongni-Donfack & Rodrigo Sekkel, 2024. "U.S. Macroeconomic News and Low-Frequency Changes in Small Open Economies’ Bond Yields," Staff Working Papers 24-12, Bank of Canada.

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