Expected inflation and other determinants of Treasury yields

OMI Seminar Series

Shocks to nominal bond yields can be decomposed into news about expected future inflation, news about expected future real short rates, and expected excess returns—all over the life of the bond. This paper estimates the magnitude of the first component for short and long maturity Treasury bonds. At a quarterly frequency, variances of news about expected inflation account for between 10 to 20 percent of variances of yield shocks. This result is robust statistically and stable across time. Standard dynamic models with long-run risk imply corresponding variance ratios close to one. Habit formation models fare somewhat better. The influences of shocks to real rates and expected excess returns cannot be disentangled reliably in the data owing to statistical uncertainty of the persistence of real-rate shocks.

Please note this event will be held at SBS

Speaker(s):

Greg Duffee, Professor of Economics, Johns Hopkins

Date:
Tuesday, May 24, 2016 - 12:15
to 13:15