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. 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.

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• Item metadata

  Item type:	Article
  ID code:	87991
  Dates:	Date Event 4 February 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:	26 Apr 2024 10:51
  URI:	https://strathprints.strath.ac.uk/id/eprint/87991