Template-type: ReDIF-Paper 1.0
Author-Name: Carlo A. Favero
Author-Name: Ruben Fernandez-Fuertes
Title: Modelling the Term Structure with Trends in Yields and Cycles in Excess Returns
Abstract: This paper proposes an Affine Macro Term Structure model in which yields are drifting, sharing a common stochastic trend driven by the drift in short-term (monetary policy) rates and excess returns are stationary as the compensation for risk is driven by the cycles in yields. We apply the approach to US data and compare the empirical results from the new specification with those obtained from standard Affine Term Structure models. The cycle-trend decompositionbased Affine Term Structure model produces much better forecasts of the dynamics of yields and, consequently, different and stationary dynamics for the term premia.
Classification-JEL:  E43, E52, G12.
Keywords: Affine Term Structure Models, Trends and Cycles, Term Premia
Length: 39
Number: 23210
Creation-Date: 2023
File-URL: https://repec.unibocconi.it/baffic/baf/papers/cbafwp23210.pdf
File-Format: application/pdf
File-Size: 
Handle: RePEc:baf:cbafwp:cbafwp23210