Report

Deconstructing the yield curve


Abstract: We introduce a novel nonparametric bootstrap for the nominal yield curve which is agnostic to the true factor structure. We deconstruct the yield curve into primitive objects, with weak cross-sectional and time-series dependence, which serve as building blocks for resampling the data. We analyze the asymptotic and finite-sample properties of the bootstrap for mimicking salient features of the data and conducting inference on bond return predictability. We demonstrate the applicability of our results to: the “tent shape” in forward rates, regression tests of the expectations hypothesis, the role of trend inflation in expected bond returns, and yield-based forecasts of recessions.

Keywords: term structure of interest rates; resampling-based inference; factor models; bond risk premiums; predictive regression of bond returns;

JEL Classification: C15; C58; G10; G12;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2019-04-01

Number: 884

Note: Revised August 2023.