Seminars for 2019-2020
Yield Curve Volatility and Macroeconomic Risks
How important are macro risks for explaining variation in bond yields? We establish new evidence by uncovering dynamic aspects of the macroeconomic impact on yield curve volatility. To achieve this, we introduce a novel no-arbitrage macro-finance term structure model with multivariate GARCH volatility. Our model is tractable and can match realized volatility of U.S. Treasury bond yields from 1971 to 2018. We find that the fraction of yield curve variation due to macro risks (i) is highly time-varying ranging from 0-70%; (ii) exhibits large month-to-month changes that can be attributed to announcement effects; (iii) is pro-cyclical; (iv) is self-reinforcing as macro risks generate more yield variation in times where the macroeconomic impact is already high; and (v) displays an upward trend throughout our sample. Furthermore, we show that the joint behavior of macroeconomic and financial variables is sensitive to the amount of yield curve volatility. Overall, our results insist on the importance of state-dependent models and methods in macro-finance.
Thursday, November 7, 2019 – 11am-noon – Stevanovich Center Library
Professor of Financial Economics at Imperial College London
Thursday, April 2, 2020 – 11am-noon – Stevanovich Center Library
Associate Professor in the Department of Economics and Business at the Universitat Pompeu Fabra, Barcelona, Spain