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This doctoral thesis studies the behavior of yields on government bonds. I focus on three aspects of the yield curve: (i) the link between bond yields and key macro quantities such as consumption growth, (ii) the process of expectations formation about the short term interest rate which, in most developed markets, is the main monetary policy instrument, and (iii) the behavior of interest rate volatilities across different maturities. These research questions share a common goal which is to provide guidance for designing macroeconomic models of the yield curve. The economic theory has clear predictions about the joint behavior of macro quantities and the yield curve. However, it has been hard to reconcile these predictions with the observed dynamics of yields. Chapter 1: „Intertemporal Trade-off and the Yield Curve“ empirically evaluates and models the relationship between consumption growth and short term riskless interest rate, charaterized by the elasticity of intertemporal substitution (EIS). Chapter 2: „Expecting the Fed“ studies how investors form their expectations about the short rate. In particular, it evaluates if and how investors expectations deviate from the benchmark of full information rational expectations. Chapter 3 „Information in the term structure of yield curve volatility“ analyzes the dynamic features of yield volatilities and undertakes their modeling. Chapters 2 and 3 are based on joint work with Anna Cieslak. |
