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Salience effect and yield curve

Author

Listed:
  • Zhihao Hu
  • Guokai Song
  • Yuhan Wang
  • Yating Duan

Abstract

This paper studies the influence of salience on nominal and real yield curves by introducing the salience effect in the Piazzesi and Schneider model (hereafter PS). We construct the salience values based on the expected consumption growth using U.S. data. We find that salience values are negatively correlated with the expected consumption growth rates. Based on U.S. data from 1960q1 to 2020q4, we find that the salience model can generate upward nominal and real yield curves within reasonable risk aversion coefficients (less than 10), as well as well-fitted average yields with actual data. The salience model compensates for the PS or recursive preference model’s inability to generate an upward nominal or real yield curve within reasonable risk aversion. Furthermore, we provide empirical support for model implications.

Suggested Citation

  • Zhihao Hu & Guokai Song & Yuhan Wang & Yating Duan, 2024. "Salience effect and yield curve," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 37(1), pages 2341227-234, January.
    • Handle: RePEc:taf:reroxx:v:37:y:2024:i:1:p:2341227
    DOI: 10.1080/1331677X.2024.2341227
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