Working Paper: CEPR ID: DP16274
Authors: Michael Bauer; Mikhail Chernov
Abstract: The conditional skewness of Treasury yields is an important indicator of the risks to the macroeconomic outlook. Positive skewness signals upside risk to interest rates during periods of accommodative monetary policy and an upward-sloping yield curve, and vice versa. Skewness has substantial predictive power for future bond excess returns, high-frequency interest rate changes around FOMC announcements, and survey forecast errors for interest rates. The estimated expectational errors, or biases in beliefs, are quantitatively important for statistical bond risk premia. These findings are consistent with a heterogeneous-beliefs model where one of the agents is wrong about consumption growth
Keywords: bond markets; yield curve; skewness; biased beliefs; monetary policy
JEL Codes: E43; E44; E52; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| conditional skewness of treasury yields (C46) | future bond returns (G12) |
| monetary policy (E52) | conditional skewness of treasury yields (C46) |
| conditional skewness of treasury yields (C46) | bond excess returns (G12) |
| expectational errors (D84) | statistical bond risk premia (G12) |
| monetary policy (E52) | future bond returns (G12) |