yield curve

New paper on skewness in interest rates

Mike Chernov and I have written a paper on the information content in option-implied skewness. We find that conditional skewness is closely related to financial conditions and monetary policy, but contains substantial additional predictive power for future interest rates, bond returns, and survey forecast errors. Our findings can be rationalized in a simple model with biased beliefs. The paper is available here.

New version of "Market-Based Monetary Policy"

We substantially revised our working paper “Market-Based Monetary Policy Uncertainty” and posted the new version online. The new version of the paper, which is coauthored with Aeimit Lakdawala and Philippe Mueller, not only includes several new results, but in addition features a simple model for the short-term interest rate with jumps around FOMC announcements, which is helpful for interpreting our empirical findings on the resolution of uncertainty and the FOMC uncertainty cycle.

"Interest Rates Under Falling Stars" forthcoming in American Economic Review

My paper with Glenn Rudebusch “Interest Rates Under Falling Stars” was accepted for publication in the American Economics Review. The paper, supplemental appendix, and complete replication data and code are available here.

New revision of "Interest Rates Under Falling Stars"

Glenn Rudebusch and I finished another round of revisions of our paper “Interest Rates Under Falling Stars” which we just sent back to the American Economics Review. This version includes a lot more details about our novel yield-curve model with a time-varying trend. We will make the complete data and code available once the paper is published. You can download the new version of the paper here.

SF Fed Blog Post on the Yield Curve

Thomas Mertens and I wrote a post for the SF Fed Post on the current shape of the yield curve. This shape is a little odd, to say the least: The conventional ten-year-minus-three-month spread has declined substantially over the last year, but is still positive. By contrast, the five-minus-one-year spread has turned negative. What to make of this? Read the post here: Did the Yield Curve Flip? Will the Economy Dip?

New version of "Interest Rates Under Falling Stars"

Glenn Rudebusch and I finished a new version of our paper “Interest Rates Under Falling Stars” which includes a lot of new material. Most importantly, we developed a new model for the yield curve that allows for shifting long-run trends and provides a new, fully Bayesian estimate of the equilibrium nominal interest rate $i^\ast$. You can download the new version of the paper here.

FRBSF Economic Letter: Information in the Yield Curve about Future Recessions

Thomas and I wrote a second Economic Letter about the information in the yield curve for predicting recessions. Here we focus on what different measure of the shape of the yield curve—that is, which yield spread—appears to have the most information. We conclude that the classic 10-year minus 3-month spread is the most useful one. We also discuss the role of the term premium, and how to interpret this evidence. (Correlation is not causation!

FRBSF Economic Letter: Economic Forecasts with the Yield Curve

Thomas Mertens and I wrote an Economic Letter on predictings recessions with the yield curve. There has been a lot of public discussion about whether a flat yield curve contains a strong signal about a future economic slowdown. We found that the predictive power of the yield curve for future economic activity and recessions is very strong, and remains strong even in the current environment with a low overall level of interest rates, a low term premium, and other somewhat unique circumstances.

New Economic Letter: A Conundrum in the Bond Market?

Why have long-term interest rates been falling throughout much of 2017, while the Federal Reserve has been normalizing monetary policy? At first sight, the combination of rising short rates and falling long rates seems puzzling, and even vaguely reminiscent of the famous Greenspan conundrum. But this time around, there are some good reasons that explain the flattening of the yield curve, which I discuss in my most recent Economic Letter.