Faculty of Economics and Business Administration Publications Database

Macro Expectations, Aggregate Uncertainty, and Expected Term Premia

Dick, Christian D.
Schrimpf, Andreas
Volume: 58
Pages: 58 - 80
Month: February
ISSN-Print: 0014-2921
Link External Source: Online Version
Year: 2014
Keywords: Bond risk premia; Expectations hypothesis; Time-varying risk premia; Term premia; Macroeconomic uncertainty; Forecast dispersion

Based on expectations data from the Survey of Professional Forecasters (SPF), we construct a real-time proxy for expected term premium changes of US long-term Treasury bonds. We then investigate the economic drivers of these subjective term premium expectations at the level of individual forecasters. Our results indicate that forecasters' term premium expectations are driven by expected macroeconomic conditions as well as the uncertainty of market participants about future output and inflation. An aggregate measure of forecasters' term premium expectations has predictive power for actual bond excess returns over horizons of up to one year.