TY  - JOUR
AU  - Ang,Andrew
AU  - Piazzesi,Monika
TI  - A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8363
PY  - 2001
Y2  - July 2001
UR  - http://www.nber.org/papers/w8363
L1  - http://www.nber.org/papers/w8363.pdf
N1  - Author contact info:
Andrew Ang
Columbia Business School
3022 Broadway 413 Uris
New York, NY 10027
Tel: 212/854-9154
Fax: 212/662-8474
E-Mail: aa610@columbia.edu

Monika Piazzesi
Department of Economics
Stanford University
579 Serra Mall
Stanford, CA 94305-6072
Tel: (650) 723-9289
E-Mail: piazzesi@stanford.edu
AB  - This paper describes the joint dynamics of bond yields and macroeconomic variables in a Vector Autoregression, where identifying restrictions are based on the absence of arbitrage. Using a term structure model with inflation and economic growth factors, we investigate how macro variables affect bond prices and the dynamics of the yield curve. The setup accommodates higher order autoregressive lags for the macro factors. The macro variables are augmented by traditional unobserved term structure factors. We find that the forecasting performance of a VAR improves when no-arbitrage restrictions are imposed. Models that incorporate macro factors forecast better than traditional term structure models with only unobservable factors. Variance decompositions show that macro factors explain up to 85% of the variation in bond yields. Macro factors primarily explain movements at the short end and middle of the yield curve while unobservable factors still account for most of the movement at the long end of the yield curve.
ER  -