A joint econometric model of macroeconomic and term-structure dynamics

We construct and estimate a tractable model of macroeconomic and yield curve dynamics. Bond yields are affine in the state variables of a forward-looking macromodel, and are derived assuming absence of arbitrage opportunities. Our approach allows us to interpret the dynamics of yields and risk premia in terms of macroeconomic fundamentals. In an application to German data, the forecasting performance of the model is often found to be superior to that of the best available alternatives in the affine class. Our approach has considerable success in accounting for features of the data that represent a puzzle for the expectations hypothesis.