New study reveals key to predicting changes in interest rates!
Linear projections of returns on the slope of the yield curve have puzzled experts, but new models show these findings make sense. By using dynamic term structure models, researchers matched key empirical results and found that risk-premium adjusted projections of yield changes recover predicted coefficients. The models show that risk factors directly affect market prices of risk, leading to simple risk premiums consistent with interest-rate feedback rules used in monetary policy.