Working Paper: NBER ID: w20711
Authors: Don H. Kim; Jonathan H. Wright
Abstract: We construct a no-arbitrage term structure model with jumps in the entire state vector at deterministic times but of random magnitudes. Jump risk premia are allowed for. We show that the model implies a closed-form representation of yields as a time-inhomogenous affine function of the state vector. We apply the model to the term structure of US Treasury rates, estimated at the daily frequency, allowing for jumps on days of employment report announcements. Our model can match the empirical fact that the term structure of interest rate volatility has a hump-shaped pattern on employment report days (but not on other days). The model also produces patterns in bond risk premia that are consistent with the empirical finding that much of the time-variation in excess bond returns accrues at times of important macroeconomic data releases.
Keywords: Bond Yields; Macroeconomic Announcements; Term Structure; Risk Premia
JEL Codes: C32; E43; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroeconomic news announcements (E60) | bond yields (G12) |
| employment report (J68) | bond yields (G12) |
| macroeconomic news announcements (E60) | yield volatility (G17) |
| employment report (J68) | yield volatility (G17) |
| employment report days (J68) | interest rate volatility (E43) |
| announcement effects (E60) | bond yields (E43) |