DP8063 The bond yield conundrum: alternative hypotheses and the state of the economy

Author(s): Sylvester C W Eijffinger, Ronald J Mahieu, Louis Raes
Publication Date: October 2010
Keyword(s): affine models, monetary policy, term premium, yield curve
JEL(s): E43, E44, E52
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8063

We study the bond yield conundrum in a macro-finance framework. Building upon a flexible and non-structural macro-finance model, we test the hypothesis that the bond yield conundrum is connected to various sources of uncertainty in the financial markets. Moreover we explicitly test for the role of the state of the economy. Our findings give a richer description of the drivers of the term premium yet the conundrum remains. The results in this paper indicate that the underlying observable drivers of the term premium are not yet fully understood.