Home About Latest Browse RSS Advanced Search

Board of Governors of the Federal Reserve System (U.S.)
Finance and Economics Discussion Series
Macro Risks and the Term Structure of Interest Rates
Geert Bekaert
Eric Engstrom
Andrey Ermolov
Abstract

We use non-Gaussian features in U.S. macroeconomic data to identify aggregate supply and demand shocks while imposing minimal economic assumptions. Recessions in the 1970s and 1980s were driven primarily by supply shocks, later recessions were driven primarily by demand shocks, and the Great Recession exhibited large negative shocks to both demand and supply. We estimate "macro risk factors" that drive "bad" (negatively skewed) and "good" (positively skewed) variation for supply and demand shocks. The Great Moderation is mostly accounted for by a reduction in good variance. In contrast, bad variances for both supply and demand shocks, which account for most recessions, shows no secular decline. We document that macro risks significantly contribute to the variation yields, risk premiums and return variances for nominal bonds. While overall bond risk premiums are counter-cyclical, an increase in demand variance lowers risk premiums.


Download Full text
Cite this item
Geert Bekaert & Eric Engstrom & Andrey Ermolov, Macro Risks and the Term Structure of Interest Rates, Board of Governors of the Federal Reserve System (U.S.), Finance and Economics Discussion Series 2017-058, Jun 2017.
More from this series
JEL Classification:
Subject headings:
Keywords: Bond return predictability ; Business cycle ; Great moderation ; Macroeconomic volatility ; Term premium
DOI: 10.17016/FEDS.2017.058
For corrections, contact Franz Osorio ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal