Search Results
Working Paper
A Portfolio-Balance Approach to the Nominal Term Structure
Explanations of why changes in the relative quantities of safe debt seem to affect asset prices often appeal informally to a ?portfolio balance? mechanism. I show how this type of effect can be incorporated in a general class of structural, arbitrage-free asset-pricing models using a numerical solution method that allows for a wide range of nonlinearities. I consider some applications in which the Treasury market is isolated, investors have mean-variance preferences, and the short-rate process is truncated at zero. Despite its simplicity, a version of this model incorporating inflation can ...
Working Paper
Unspanned macroeconomic factors in the yield curve
In this paper, we extract common factors from a cross-section of U.S. macro-variables and Treasury zero-coupon yields. We find that two macroeconomic factors have an important predictive content for government bond yields and excess returns. These factors are not spanned by the cross-section of yields and are well proxied by economic growth and real interest rates.
Working Paper
Term Structure Modeling with Supply Factors and the Federal Reserve's Large Scale Asset Purchase Programs
This paper estimates an arbitrage-free term structure model with both observable yield factors and Treasury and Agency MBS supply factors, and uses it to evaluate the term premium effects of the Federal Reserve's large-scale asset purchase programs. Our estimates show that the first and the second large-scale asset purchase programs and the maturity extension program jointly reduced the 10-year Treasury yield by about 100 basis points.
Working Paper
The Impact of Monetary Policy on Asset Prices
Estimating the response of asset prices to changes in monetary policy is complicated by the endogeneity of policy decisions and the fact that both interest rates and asset prices react to numerous other variables. This paper develops a new estimator that is based on the heteroskedasticity that exists in high frequency data. We show that the response of asset prices to changes in monetary policy can be identified based on the increase in the variance of policy shocks that occurs on days of FOMC meetings and of the Chairman's semi-annual monetary policy testimony to Congress. The identification ...
Working Paper
Does the Yield Curve Predict Output?
Does the yield curve have the ability to predict output and recessions? At some times and in certain places, of course! But many details are matters of dispute: When and where does the yield curve predict successfully, which aspects of the curve matter most, and which economic forces account for the predictive ability? Over the years, an increasingly sophisticated set of tools, both statistical and theoretical, have addressed these issues. For the US, an inverted yield curve, particularly when the spread between the yield on 10-year and 3-month Treasuries becomes negative, has been a robust ...
Working Paper
Term Premium and Bank Lending
We document an “expected bank profitability” channel linking the term premium to bank lending. We formalize this channel using a dynamic bank portfolio model predicting that a higher term premium raises banks’ expected returns from maturity transformation, incentivizing credit provision, with stronger effects for more leveraged banks. Using supervisory microdata, the unanticipated term premium rise after the 2013 Taper Tantrum, and U.S. Basel III capital surprises, we show that more leveraged banks expand lending more, supporting firm-level investment and growth. Our findings suggest ...