“When Long-run Trends are Unknown: Bond Pricing Implications”
With the Lunch Seminar series, the Department of Finance is bringing eminent and up-and-coming researchers from around the world to Luxembourg.
Abstract
What macroeconomic insights can the term structure of Treasury yields give us when investors need to disentangle permanent and transitory aggregate shocks? We formulate a macro-finance model where inflation, growth, and the monetary policy rate are driven by a combination of long-run trends and shorter-lived cycles. The representative investor only observes the aggregate macroeconomic variables but not their decomposition in permanent and transitory components, so she performs Bayesian learning. Despite the learning complexity, our model produces closed-form affine Treasury yields formulas. Estimation reveals significant uncertainty about long-term real interest rate estimates, in sharp contrast with those obtained from perfect information models. We find that because the investor confuses trends with cycles when faced with aggregate macroeconomic movements, the yield curve can under or overreact to structural shocks.
About the speaker
Guillaume Roussellet is an Assistant Professor of Finance at McGill University and Research Economist at the Federal Reserve Bank of New York.
Language
English.
This is a free event. Registration is mandatory.
Cold lunches are provided to registered participants only.