Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of San Francisco
Working Paper Series
Resolving the spanning puzzle in macro-finance term structure models
Michael D. Bauer
Glenn D. Rudebusch
Abstract

Previous macro-finance term structure models (MTSMs) imply that macroeconomic state variables are spanned by (i.e., perfectly correlated with) model-implied bond yields. However, this theoretical implication appears inconsistent with regressions showing that much macroeconomic variation is unspanned and that the unspanned variation helps forecast excess bond returns and future macroeconomic fluctuations. We resolve this contradiction—or “spanning puzzle”—by reconciling spanned MTSMs with the regression evidence, thus salvaging the previous macro-finance literature. Furthermore, we statistically reject “unspanned” MTSMs, which are an alternative resolution of the spanning puzzle, and show that their knife-edge restrictions are economically unimportant for determining term premia.


Download Full text
Cite this item
Michael D. Bauer & Glenn D. Rudebusch, Resolving the spanning puzzle in macro-finance term structure models, Federal Reserve Bank of San Francisco, Working Paper Series 2015-1, Jan 2015, revised 12 May 2015.
More from this series
JEL Classification:
Subject headings:
Keywords: yield curve; term structure models; macro-finance; unspanned macro risks; monetary policy
DOI: 10.24148/wp2015-01
For corrections, contact Federal Reserve Bank of San Francisco Research Library ()
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