The effect of macroeconomic factors on the yield curve

Specialeforsvar ved Christina Faldt og Tina Vist Salo

Titel: The effect of macroeconomic factors of the yield curve.

Abstract: We examine the effect of macroeconomic factors on the yield curve. In order to do so we consider a joint model with macro factors and latent variables explaining the short rate as done by (Ang and Piazzesi, 2003). The model is of high order, and therefore estimation is difficult and very path dependant. We restrict and simplify the model by (Ang and Piazzesi, 2003) in order to achieve a simpler estimation procedure, that without too specific starting values produces reasonable results. We show that the macro factors account for up to 32 % of the variation of the yield curve when considering a time period before 2000. Primarily, they explain the short and middle end of the yield curve, and the latent factors account for the remaining variation. If we consider recent time including the financial crisis the macro factors barely explain any variation, as the yield curve is flat

Vejledere: Rolf Poulsen / Søren Hove Ravn

Censor:    Claus Munk, CBS