We undertake a variance decomposition of index-linked bond returns for the US, the UK and Iceland. In all cases, news about future excess returns is the key driver though only for Icelandic bonds are returns independent of inflation.

This paper compares the forecast precision of the Functional Signal plus Noise (FSN), the Dynamic Nelson–Siegel (DL), and a random walk model. The empirical results suggest that both outperform the random walk at short horizons (one-month) and that the FSN model outperforms the DL at the one-...

With interest rates near the zero lower bound, I propose a simple framework to indicate the monetary policy stance as a “shadow short rate”. I apply a one-factor model to Japan, provide associated economic intuition, and discuss multiple-factor extensions.

When the yield curve is modelled using an affine factor model, residuals may still contain relevant information and do not adhere to the familiar white noise assumption. This paper proposes a pragmatic way to improve out of sample performance for yield curve forecasting. The proposed adjustment...

Analytical expectational stability results are obtained for both Euler-equation and infinite-horizon adaptive learning in a simple stochastic growth model. The rational expectations equilibrium is stable under both types of learning, though there are important differences in the learning dynamics.

We study the leading properties of 30 US high yield spreads for economic growth between 1996 and 2012 and show that they disappeared in the second half of the 2000s. Our empirical findings demonstrate the unreliability of high yield spreads as leading indicators and cast doubts on the existence...

It is well documented that the term structure of interest rates has predictive power for real economic growth. Applying the stepwise superior predictive ability test, we find that superior models contain both a short-term rate and a term spread.

We propose an alternative approach to examine the nonlinear (asymmetric) behaviour of interest rates which can be both size and sign dependent. Compared to other widely used approaches, our model performs quite well based on two model selection criteria.

This paper suggests that part of the implied time Subjective Discount Rate (SDR) collected by Willingness To Pay (WTP) is an immediate premium. We offer a theoretical and experimental analysis of the gross SDR, which consists of the immediate premium and the net SDR (i.e., SDR less the immediate...

The relationship between fiscal and financial euro area indicators and sovereign yield spreads has changed after the start of the financial crisis. Increased financial volatility has magnified the impact of fiscal conditions as drivers of sovereign risk, has widened the set of macroeconomic...