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Handbook of the Economics of Finance by Rene M. Stulz, Milton Harris, George M. Constantinides

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Chapter 13

Bond Pricing and the Macroeconomy *

Gregory R. Duffee

Johns Hopkins University, 440 Mergenthaler Hall, 3400 N. Charles St., Baltimore, MD 21218, USA, duffee@jhu.edu

Abstract

This chapter reviews some of the academic literature that links nominal and real term structures with the macroeconomy. The main conclusion is that none of our models is consistent with basic properties of nominal yields. It is difficult to explain the average shape of the nominal yield curve, the variation of yields over time, and the predictability of excess bond returns. There are two overarching problems. First, much of the variation over time in economic activity is orthogonal to variation in nominal yields, and vice versa. Second, although mean excess returns ...

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