An Extended Macro-Finance Model with Financial Factors

Hans Dewachter and Leonardo Iania

MPRA Paper from University Library of Munich, Germany

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 and is most pronounced at the high- and intermediate frequencies.

Keywords: Term structure; Macro-finance; TED spread; Interbank lending rates (search for similar items in EconPapers)
JEL-codes: C11 E43 E44 G12 (search for similar items in EconPapers)
Date: 2009-10-02
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (25)

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https://mpra.ub.uni-muenchen.de/18816/1/MPRA_paper_18816.pdf revised version (application/pdf)

Related works:
Working Paper: An Extended Macro-Finance Model with Financial Factors (2012)
Journal Article: An Extended Macro-Finance Model with Financial Factors (2011)
Working Paper: An Extended Macro-Finance Model with Financial Factors (2010)
Working Paper: An extended macro-finance model with financial factors (2009)
Working Paper: An Extended Macro-Finance Model with Financial Factors (2009)
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