A Quantitative Theory of Risk Premiums on Securities with an Application to the Term Structure of Interest Rates

In recent decades, long-term interest rates around the world have fallen to historic lows. We examine this decline using a dynamic term structure model of Canadian nominal and real yields with adjustments for term, liquidity, and inflation risk premiums. Canada provides a useful case study that has been little examined despite its established indexed debt market, negligible distortions from monetary quantitative easing or the zero lower bound, and no sovereign credit risk. We find that since 2000, the steady-state real interest rate has fallen by more than 2 percentage points, long-term inflation expectations have edged down, and real bond and inflation risk premiums have fluctuated but shown little longer-run trend. Therefore, the drop in the equilibrium real rate appears largely to account for the lower new normal in interest rates.

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Evaluating the existence of structural change in the Brazilian term structure of interest rate: evidence based on Hansens cointegration models with structural break

São Paulo Journal of Mathematical Sciences ◽

10.11606/issn.2316-9028.v8i2p211-239 ◽

2014 ◽

Vol 8 (2) ◽

pp. 211

Author(s):

Emerson F. Marcal ◽

Pedro L. Valls Pereira

Keyword(s):

Structural Change ◽

Interest Rate ◽

Interest Rates ◽

Term Structure ◽

Risk Premium ◽

Structural Break ◽

Sample Period ◽

Data Set ◽

Risk Premiums ◽

Vector Autoregressive

This paper investigates whether there is evidence of struc- tural change in the Brazilian term structure of interest rates. Multivari- ate cointegration techniques are used to verify this evidence. An econo- metric model is estimated which is a Vector Autoregressive Model with Error Correction Mechanism (VECM) with abrupt structural change formulated by Hansen [13]. Two datasets were analysed. The rst one contains a nominal interest rate with maturity up to three years. The second data set focuses on maturity up to one year. The rst data set focuses on a sample period from 1995 to 2010 and the second from 1998 to 2010. The frequency is monthly. The estimated models suggest the existence of structural change in the Brazilian term structure. It was possible to document the existence of multiple regimes using the tech- nique for both databases. The risk premium for dierent spreads varied considerably during the earliest period of both samples and seemed to converge to stable and lower values at the end of the sample period. Long-term risk premiums seemed to converge to international stand- ards, although the Brazilian term structure is still subject to liquidity problems for longer maturities.

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A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt

Review of Economics and Statistics ◽

10.1162/rest_a_00821 ◽

2019 ◽

Vol 101 (5) ◽

pp. 933-949 ◽

Cited By ~ 6

Author(s):

Jens H. E. Christensen ◽

Glenn D. Rudebusch

Keyword(s):

Lower Bound ◽

Interest Rates ◽

Term Structure ◽

Structural Breaks ◽

Liquidity Risk ◽

Time Varying ◽

Real Rate ◽

Risk Premiums ◽

The Past ◽

Percentage Points

The downtrend in U.S. interest rates over the past two decades may partly reflect a decline in the longer-run equilibrium real rate of interest. We examine this issue using dynamic term structure models that account for time-varying term and liquidity risk premiums and are estimated directly from prices of individual inflation-indexed bonds. Our finance-based approach avoids two potential pitfalls of previous macroeconomic analyses: structural breaks at the zero lower bound and misspecification of output and inflation dynamics. We estimate that the longer-run equilibrium real rate has fallen about 2 percentage points and appears unlikely to rise quickly.

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