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An Extended Macro-Finance Model with Financial Factors
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An Extended Macro-Finance Model with Financial Factors

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Listed:
  • Hans Dewachter
  • Leonardo Iania

Abstract

This paper extends the benchmark Macro-Finance model by introducing, next to the standard macroeconomic factors, additional liquidity-related and return forecasting factors. Liquidity factors are obtained from a decomposition of the TED spread while the return-forecasting (risk premium) factor is extracted by imposing a single factor structure on the one-period expected excess holding returns. The model is estimated on US data using MCMC techniques. Two findings stand out. First, the model outperforms significantly most structural and non-structural Macro-Finance yield curve models in terms of cross-sectional fit of the yield curve. Second, we find that financial shocks, either in the form of liquidity or risk premium shocks, have a statistically and economically significant impact on the yield curve. The impact of financial shocks extends throughout the yield curve but is most pronounced at the high and intermediate frequencies.

Suggested Citation

  • Hans Dewachter & Leonardo Iania, 2010. "An Extended Macro-Finance Model with Financial Factors," CESifo Working Paper Series 2950, CESifo.
    • Handle: RePEc:ces:ceswps:_2950
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    More about this item

    Keywords

    yield curve; affine models; macroeconomics and financial factors; Bayesian estimation;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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