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Capturing the Interaction of Trend, Cycle, Expectations and Risk Premia in the US Term Structure

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  • Soloschenko, Max
  • Weber, Enzo

Abstract

This paper deals with simultaneous interactions between the determinants of the US yield curve. For this purpose, we derive a multivariate unobserved components model based on the expectation hypothesis. The influencing factors of the term structure that arise from the structural model are a common stochastic trend, the cyclical part of the short rate and maturity-dependent term premiums in the longer rates. We establish a significant influence of both permanent and transitory innovations on the US term structure and find pronounced spillovers between the shocks of the term structure determinants. An interesting result depicts a key role of the spillovers of structural mid-term rate cycle shocks in the formation of the risk premiums.

Suggested Citation

  • Soloschenko, Max & Weber, Enzo, 2014. "Capturing the Interaction of Trend, Cycle, Expectations and Risk Premia in the US Term Structure," University of Regensburg Working Papers in Business, Economics and Management Information Systems 475, University of Regensburg, Department of Economics.
    • Handle: RePEc:bay:rdwiwi:29825
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    More about this item

    Keywords

    unobserved components; expectation hypothesis; cointegration; identification; risk premium;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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