Anne Lundgaard Hansen
Job Market PaperOnline appendix.
Abstract: I show that the relationship between the U.S. Treasury yield curve and macroeconomic risk fluctuates over time. I establish this result by introducing time-varying volatility and variance risk premia in a tractable term structure model. Based on my model, I characterize the joint behavior of the yield curve and macroeconomic risk captured by inflation and unemployment gap from 1971 to 2019. First, I find that the macroeconomic contribution to short-term yield volatility is high in the 1970s, low during the Great Moderation starting in the mid-1980s, and high again after the financial crisis. Second, investors are increasingly anchoring short-rate expectations to macroeconomic risk. Third, deflation fears increase term premia during the financial crisis. Finally, I show that macroeconomic shocks do not explain the yield curve inversion in 2019. My results suggest that the recent inversion is not a warning of an imminent recession and thus should not trigger monetary policy easing.
Other Working Papers
Abstract: It is well-known that interest rates are extremely persistent, yet they are best modeled and understood as stationary processes. These properties are contradictory in the workhorse Gaussian affine term structure model in which persistent data often result in unit roots that imply non-stationarity. We resolve this puzzle by proposing a term structure model with volatility-induced stationarity. Our model employs a level-dependent conditional volatility that maintains stationarity despite the presence of unit roots in the characteristic polynomial corresponding to the conditional mean. The model is consistent with key characteristics of interest rate data. In an empirical macro-finance application, we obtain term premia that are economically plausible and consistent with survey data. Compared to the Gaussian affine term structure model, we improve out-of-sample forecasting of the yield curve. Our empirical evidence suggests that volatility-induced stationarity is unspanned by the yield curve.
Work in Progress
A Joint Model for the Term Structures of Interest Rates and Realized Volatility
Fixed-Design Bootstrap Testing for Non-Stationarity in Double-Autoregressive Models (with Philipp Kless)