Information in the Yield Curve: A Macro-Finance Approach
Código: WPE – 230
We revisit the decomposition of yield spreads into an expectations component and a term premium component using an a¢ ne term structure model that incorporates macroeconomic and nancial factors. We use this decomposition to forecast GDP growth and ination. We nd that the yield spread decomposition is as important as the short rate and lagged variables to forecast those macroeconomic aggregates. We also extract a risk premium factor that drives the dynamics of expected excess returns and is similar to the return-forecasting factor introduced by Cochrane and Piazzesi (2005), the CP factor. Our risk premium factor is able to explain around 32% and 40% of the variability of one-and two-year excess returns, respectively, of two- to ve-year bonds and its out-of-sample performance is comparable to the one obtained with the CP factor.