Asymmetric Violations of the Spanning Hypothesis

Part of FinEML online seminar series
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Raul Riva
Friday 5 Apr 2024, 16:00 - 17:00
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We document that the Spanning Hypothesis, which is implied by most macro-finance term structure models, is violated asymmetrically along the U.S. yield curve. After controlling for information in bond prices, we find that macroeconomic variables help predict short-maturity bond returns with statistical and economic significance, while the evidence for long-maturity bonds is much weaker. 

Gustavo Freire, Raul Riva

What is the pattern

To understand this pattern, we provide a new decomposition of bond excess returns in terms of innovations of short-, medium- and long-run factors of the yield curve. We show that, in fact, macro data only contains unspanned predictive information about the short-run factor. This extra predictability varies over time and is stronger when inflation is high.

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The FinEML seminar series is designed to create a collaborative platform for the exchange of insights and findings within the field. We aim to foster a friendly atmosphere that encourages constructive feedback, providing an opportunity for both junior and senior researchers to share their work.

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