Risk Premiums in Dynamic Term Structure Models with Unspanned Macro Risks





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    • Joslin is with the University of Southern California, Marshall School of Business. Priebsch is with the Federal Reserve Board. Singleton is with Stanford University, Graduate School of Business and NBER. We are grateful for feedback from seminar participants at MIT, Stanford University, the University of Chicago, the Federal Reserve Board and Federal Reserve Bank of San Francisco, the International Monetary Fund, and the Western Finance Association (San Diego), and for comments from Greg Duffee, Patrick Gagliardini, Imen Ghattassi, Monika Piazzesi, Oreste Tristani, and Jonathan Wright. An earlier version of this paper was circulated under the title “Risk Premium Accounting in Macro-Dynamic Term Structure Models.” The analysis and conclusions set forth in this paper are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors of the Federal Reserve System.


This paper quantifies how variation in economic activity and inflation in the United States influences the market prices of level, slope, and curvature risks in Treasury markets. We develop a novel arbitrage-free dynamic term structure model in which bond investment decisions are influenced by output and inflation risks that are unspanned by (imperfectly correlated with) information about the shape of the yield curve. Our model reveals that, between 1985 and 2007, these risks accounted for a large portion of the variation in forward terms premiums, and there was pronounced cyclical variation in the market prices of level and slope risks.