Inflation Risk Premia, Yield Volatility and Macro Factors
Published, Journal of Financial Econometrics, 2019, Vol. 17:3, 397–431
51 Pages Posted: 30 Jan 2018 Last revised: 5 Mar 2021
Date Written: January 10, 2018
We incorporate a latent stochastic volatility factor and macroeconomic expectations in an affine model for the term structure of nominal and real rates. We estimate the model over 1999-2016 on U.S. data for nominal and TIPS yields, the realized and implied volatility of T-bonds and survey forecasts of GDP growth and inflation. We find relatively stable inflation risk premia averaging at 40bps at the long-end, and which are strongly related to the volatility factor and conditional mean of output growth. We also document real risk premia that turn negative in the post-crisis period, and a non-negligible variance risk premium.
Keywords: Term Structure, Inflation Risk Premia, TIPS, Yield Volatility, Macro Factors
JEL Classification: G12, E43, E44, C58
Suggested Citation: Suggested Citation