Accounting for a Shift in Term Structure Behavior with No-Arbitrage and Macro-Finance Models

Authors

Glenn D. Rudebusch

Tao Wu

Download PDF
(407 KB)

2004-25 | November 1, 2005

This paper examines a shift in the dynamics of the term structure of interest rates in the U.S. during the mid-1980s. We document this shift using standard interest rate regressions and using dynamic, affine, no-arbitrage models estimated for the pre- and post-shift subsamples. The term structure shift largely appears to be the result of changes in the pricing of risk associated with a "level" factor. Using a macro-finance model, we suggest a link between this shift in term structure behavior and changes in the dynamics and risk pricing of the Federal Reserve’s inflation target as perceived by investors.

About the Authors