An Econometric Model of the Yield Curve with Macroeconomic Jump Effects / Monika Piazzesi.

Format:

Book

Author/Creator:

Piazzesi, Monika.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8246.

NBER working paper series no. w8246

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2001.

Summary:

This paper develops an arbitrage-free time-series model of yields in continuous time that incorporates central bank policy. Policy-related events, such as FOMC meetings and releases of macroeconomic news the Fed cares about, are modeled as jumps. The model introduces a class of linear-quadratic jump-diffusions as state variables, which allows for a wide variety of jump types but still leads to tractable solutions for bond prices. I estimate a version of this model with U.S. interest rates, the Federal Reserve's target rate, and key macroeconomic aggregates. The estimated model improves bond pricing, especially at short maturities. The snake-shape' of the volatility curve is linked to monetary policy inertia. A new monetary policy shock series is obtained by assuming that the Fed reacts to information available right before the FOMC meeting. According to the estimated policy rule, the Fed is mainly reacting to information contained in the yield-curve. Surprises in analyst forecasts turn out to be merely temporary components of macro variables, so that the hump-shaped' yield response to these surprises is not consistent with a Taylor-type policy rule.

Notes:

Print version record

April 2001.