Decomposing uncertainty in macro-finance term structure models

Byrne, Joseph P. and Cao, Shuo (2024) Decomposing uncertainty in macro-finance term structure models. The Review of Asset Pricing Studies, 14 (3). pp. 428-449. raae004. ISSN 2045-9939 (https://doi.org/10.1093/rapstu/raae004)

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Abstract

This paper studies the extent to which macro-finance term structure models are susceptible to predictive uncertainty. We propose a general form of arbitrage-free models and quantify the relative importance of unpredictable priced risk variance, as well as macro-finance model uncertainty and learning uncertainty in predictability. Predictive performance and relative contributions of uncertainty sources are dynamically measured based on Bayesian methods, revealing dominating priced risk variance and other important uncertainty sources at different points in time. Macro-finance model uncertainty is high for near-term forward spread forecasts and contributes up to 87% of predictive uncertainty prior to recessions, implying strong dispersion in the information content of macro variables when forming near-term monetary policy expectations.

  • Item type:Article
    ID code:87991
    Dates:
    Date
    Event
    1 September 2024
    Published
    4 February 2024
    Published Online
    25 January 2024
    Accepted
    Notes:Copyright © 2024 Oxford University Press. This is a pre-copy-editing, author-produced version of an article accepted for publication in The Review of Asset Pricing Studies following peer review. The definitive publisher-authenticated version (Joseph P Byrne, Shuo Cao, Decomposing Uncertainty in Macro-Finance Term Structure Models, The Review of Asset Pricing Studies, 2024, raae004) is available online at: https://doi.org/10.1093/rapstu/raae004
    Subjects:Social Sciences > Finance
    Science > Mathematics > Probabilities. Mathematical statistics
    Department:Strathclyde Business School > Economics
    Depositing user: Pure Administrator
    Date deposited:30 Jan 2024 14:00
    Last modified:11 Nov 2024 14:12
    URI:https://strathprints.strath.ac.uk/id/eprint/87991
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