"The Yield Curve and Macroeconomic Data News" - Economics Seminar

Event Date: 18 October 2023

Speaker: Ana Galvao, Professor of Economics

Time: 4-5:15pm

Location: Please contact Rachel Hill (r.hill@strath.ac.uk) for Zoom details

Abstract: "I propose to model the dynamic interlinkages between fundamental macroeconomic data and the yield curve by first summarising the news from economic data releases into two daily surprise indexes – a growth and an inflation surprise index. Then, these measures of macroeconomic news are incorporated into term-structure models. First, a Dynamic Nelson and Siegel model combines them with yield factors. Yield forecasts are significantly improved, suggesting that macroeconomic data surprises have persistent effects on yields, even if these effects are not initially all priced. Second, I augment an affine term structure model to include the surprise indexes. I show how to use the model to compute the dynamic responses of yields of any maturity to data surprises. The dynamic responses are decomposed between changes attributed to fundamentals – risk-free expected value – and risk – term premium. They indicate that positive inflation surprises increase the fundamental 10-year yield, but their risk declines over the medium term. Empirical evidence is provided for both US Treasury Bonds and UK Gilts.”

Published: 25 October 2023