Working Paper: CEPR ID: DP15978
Authors: Emanuel Moench; Soroosh Soofi Siavash
Abstract: We identify a yield news shock as an innovation that does not move Treasury yields contemporaneouslybut explains a maximum share of their future variation. Yields do not immediatelyrespond to the news shock as the initial reaction of term premiums and expected short rates offseteach other. While the impact on term premiums fades quickly, expected short rates and thusyields decline persistently. As a result, the shock explains a staggering 50 percent of Treasuryyield variation several years out. A positive yield news shock is associated with a coincidentsharp increase in stock and bond market volatility, a contemporaneous response of leading economicindicators, and is followed by a persistent decline of real activity and inflation which isaccommodated by the Federal Reserve. Identified shocks to realized stock market volatility andbusiness cycle news imply similar impulse responses and together capture the bulk of variationof the yield news shock.
Keywords: term structure of interest rates; yield curve; news shocks; volatility shocks; business cycle news; structural dynamic factor models
JEL Codes: C55; E43; E44; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| yield news shock (E60) | treasury yields (E43) |
| yield news shock (E60) | expected future short rates (E43) |
| yield news shock (E60) | term premiums (G12) |
| expected future short rates (E43) | treasury yields (E43) |
| yield news shock (E60) | stock market volatility (G17) |
| yield news shock (E60) | bond market volatility (E43) |
| yield news shock (E60) | real economic activity (E39) |
| yield news shock (E60) | inflation (E31) |
| yield news shock (E60) | monetary policy by the Federal Reserve (E52) |
| realized stock market volatility (G17) | yield news shock (E60) |
| business cycle news (E32) | yield news shock (E60) |