Title: An extended macro-finance model with financial factors
Authors: Dewachter, Hans
Iania, Leonardo
Issue Date: 2009
Publisher: K.U. Leuven, Centrum voor Economische Studiën
Series Title: CES - Discussion paper series 09.19 pages:1-47
Abstract: This paper extends the benchmark Macro-Finance model by introducing, next to the standard macroeconomic factors, additional liquidity-related and return forecasting factors. Liquidity factors are obtained from a decomposition of the TED spread while the return-forecasting (risk premium)factor is extracted by imposing a single factor structure on the one-period expected excess holding returns. The model is estimated on US data using MCMC techniques. Two findings stand out.
First, the model outperforms significantly most structural and non-structural Macro-Finance yield curve models in terms of cross-sectional .t of the yield curve. Second, we find that financial shocks, either in the form of liquidity or risk premium shocks have a statistically and conomically significant impact on the yield curve. The impact of financial shocks extends throughout the yield curve but is
most pronounced at the high and intermediate frequencies.
Publication status: published
KU Leuven publication type: IR
Appears in Collections:Research Center of International Economics, Leuven

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