Presenter: Anne Lundgaard Hansen (University of Copenhagen)
Ratios of standard deviation in macroeconomic variables to bond yield volatility fluctuate over time. I propose a macro-finance term structure model that accommodates this empirical fact via time-varying variance decompositions. My model is tractable and matches empirical measures of conditional bond market volatility. Using my model, I establish new results on the relationship between U.S. Treasury yield curve and the real economy. First, I document an increasing trend in the macroeconomic contribution to yield curve volatility since the 1970s. Second, macroeconomic shocks drive negative correlation between short-rate expectations and term premia that weakens monetary policy effectiveness. Finally, investors demand compensation for macroeconomic risk through a variance risk premium.