Title: Yield curve volatility and macroeconomic risks
Authors: Anne Hansen - University of Copenhagen and Danmarks Nationalbank (Denmark) [presenting]
Abstract: Understanding the joint dynamics of the yield curve and macroeconomic variables is important for policy makers and risk managers. While these dynamics are well-studied in terms of levels, less is known about the interactions between yield curve volatility and the macroeconomy. We bridge this gap by proposing a tractable term structure model that allows macroeconomic risks to determine both bond yields and their conditional variances. To begin with, our model can match U.S. Treasury bond yield levels and realized variances when model parameters are estimated based on yield data alone. Including measurements of inflation and real activity improves the ability of the model to capture yield curve volatility. By means of regressions, we provide further evidence that macroeconomic risks predict realized variances over and above the information contained in the yield curve itself. Key to the success of our model is a generalized stochastic discount factor that allows investors to price both level and variance risks. We show how macroeconomic risks relate to these risk preferences.