Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset: Comment

Term premia implied by maximum likelihood estimates of affine term structure models are misleading because of small-sample bias. We show that accounting for this bias alters the conclusions about the trend, cycle, and macroeconomic determinants of the term premia estimated in Wright (2011). His term premium estimates are essentially acyclical, and often just parallel the secular trend in longterm interest rates. In contrast, bias-corrected term premia show pronounced countercyclical behavior, consistent with theoretical and empirical arguments about movements in risk premia. (JEL E31, E43, E52, G12, H63)

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Bond risk premia in consumption‐based models

Quantitative Economics ◽

10.3982/qe887 ◽

2020 ◽

Vol 11 (4) ◽

pp. 1461-1484 ◽

Cited By ~ 2

Author(s):

Drew D. Creal ◽

Jing Cynthia Wu

Keyword(s):

Term Structure ◽

Time Preference ◽

Risk Premia ◽

Recursive Preferences ◽

Affine Term Structure ◽

Affine Term Structure Models ◽

Bond Risk Premia ◽

Bond Risk ◽

Term Premia ◽

Conditional Means

Gaussian affine term structure models attribute time‐varying bond risk premia to changing risk prices driven by the conditional means of the risk factors, while structural models with recursive preferences credit it to stochastic volatility. We reconcile these competing channels by introducing a novel form of stochastic rate of time preference into an otherwise standard model with recursive preferences. Our model is affine and has analytical bond prices making it empirically tractable. We use particle Markov chain Monte Carlo to estimate the model, and find that time variation in bond term premia is predominantly driven by the risk price channel.

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Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset

The American Economic Review ◽

10.1257/aer.101.4.1514 ◽

2011 ◽

Vol 101 (4) ◽

pp. 1514-1534 ◽

Cited By ~ 210

Author(s):

Jonathan H Wright

Keyword(s):

Interest Rates ◽

Empirical Evidence ◽

Term Structure ◽

Industrialized Countries ◽

Bond Yields ◽

Inflation Uncertainty ◽

Term Structure Model ◽

Forward Rates ◽

International Panel ◽

Term Premia

This paper provides cross-country empirical evidence on term premia. I construct a panel of zero-coupon nominal government bond yields spanning ten industrialized countries and nearly two decades. I hence compute forward rates and use two different methods to decompose these forward rates into expected future short-term interest rates and term premiums. The first method uses an affine term structure model with macroeconomic variables as unspanned risk factors; the second method uses surveys. I find that term premiums declined internationally over the sample period, especially in countries that apparently reduced inflation uncertainty by making substantial changes in their monetary policy frameworks. (JEL E13, E43, E52, G12, H63)

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A NEW FINITE ELEMENT METHOD FOR PRICING OF BOND OPTIONS UNDER TIME INHOMOGENEOUS AFFINE TERM STRUCTURE MODELS OF INTEREST RATES

International Journal of Theoretical and Applied Finance ◽

10.1142/s021902490700410x ◽

2007 ◽

Vol 10 (01) ◽

pp. 31-49

Author(s):

HONGTAO YANG

Keyword(s):

Finite Element Method ◽

Finite Element ◽

Interest Rates ◽

Term Structure ◽

Cir Model ◽

Affine Term Structure ◽

Affine Term Structure Models ◽

Bond Options ◽

The Stability ◽

Element Method

In this paper we propose a new finite element method for pricing of bond options under time inhomogeneous one-factor affine models of short interest rates: the Hull–White model and the extended CIR model. The stability and weak convergence are established. Numerical results are presented to examine the method and to compare the calibrated models.

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