Combined effect of macroeconomic variables on term premiums
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- Category: Economy and management
- Last Updated on 02 October 2016
- Published on 02 October 2016
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Authors:
Tiantian Wang, School of Management, Fudan University, Shanghai, China
Chenghu Ma, School of Management, Fudan University, Shanghai, China
Abstract:
Purpose. Economists have found that macroeconomic variables influence the term structure of interest rates. In this paper we will investigate the combined effect of macroeconomic variables.
Methodology. This paper applies partial least square method to extract a macroeconomic factor from 23 macroeconomic variables, and explore the predictive effect of the macroeconomic factor on term premiums. To explore the persistence of the effect, the impulse response analysis of the macroeconomic factor on term premiums is carried out.
Findings. It has been found that the macroeconomic factor extracted by the partial least squares method can predict the changes of the term premiums efficiently. Furthermore, the impact of the macroeconomic factor on term premiums will disappear after three to four years.
Originality. To study the relationship between macro economy and the term structure of interest rates, this paper first applies the partial least square method to extract the macroeconomic factor. A series of research on macro economy and term premiums can be carried out. The research on this aspect has not been found at present.
Practical value. The results in this paper are helpful to understand the combined impact of the macro economy on the interest rate term structure. On the one hand, it can help investors to understand how the Treasury yield curve is affected by macro economy. On the other hand, it provides a good reference for policy makers to understand the current economic status and the reflex of market on policy.
References/Список літератури
1. Favero, C.A., Niu, L. and Sala L., 2012. Term structure forecasting: No – arbitrage restrictions versus large information set. Journal of Forecasting, Vol. 31, No. 2, pp. 124–156.
2. Orphanides, A. and Wei, M., 2012. Evolving macroeconomic perception and the term structure of interest rates. Journal of Economic Dynamics and Control, Vol. 36, No. 2, pp. 239–254.
3. Kaya, H., 2013. The yield curve and the macroeconomy evidence from Turkey. Economic Modeling, Vol. 32, No. 5, pp. 100–107.
4. Kim, H. and Park, H., 2013. Term structure dynamics with macro-factors using high frequency data, Journal of Empirical Finance, Vol. 22, No. 3, pp. 78– 93.
5. Ma, C., 2011. Advanced asset pricing theory. London: Imperial College Press.
6. Kelly, B. and Pruitt, S., 2013. Market expectations in the cross-section of present values. Journal of Finance, Vol. 68, No. 5, pp. 1721–1756.
7. Kelly, B.T. and Pruitt S., 2014. The Three-pass regression filter: A new approach to forecasting using many predictors. Journal of Econometrics, Vol. 186, No. 2, pp. 294–316.
8. Huang, D., Jiang, F., Tu, J. and Zhou, G., 2015. Investor sentiment aligned: a powerful predictor of stock returns. Review of Financial Studies, Vol. 28, No. 3, pp. 791–837.
9. Cochrane, J.H. and Piazzesi, M., 2005. Bond risk premia. American Economic Review, Vol. 95, No. 1, pp. 138–160.
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