Risk Premia in the Term Structure of Interest Rates: A Panel Data Approach

35 Pages Posted: 5 Apr 2002

See all articles by Dennis Bams

Dennis Bams

University of Maastricht - Limburg Institute of Financial Economics (LIFE)

Christian C. P. Wolff

University of Luxembourg; Centre for Economic Policy Research (CEPR)

Date Written: February 2000

Abstract

This paper proposes a panel data approach to modeling the risk premium in the term structure of interest rates. Specifically, we develop a fixed maturity/random time effects model that implies a time-invariant one-factor model. Our approach allows us to disentangle risk premia and unexpected excess returns, which is not possible in the standard time series approach. In addition, small sample bias is alleviated and statistical efficiency improved. Our results allow for interesting inferences about maturity-specific effects in the term structure. First, the expectations hypothesis is soundly rejected for our full data panel of U.S. Treasury securities. Second, a considerable degree of mean reversion is present in the risk premia. Third, our findings shed new light on the magnitude of the slope coefficient in regressions of the yield onto the forward curve.

Keywords: Expectations hypothesis, risk premium

JEL Classification: E43, G12

Suggested Citation

Bams, Dennis and Wolff, Christian C. P., Risk Premia in the Term Structure of Interest Rates: A Panel Data Approach (February 2000). Available at SSRN: https://ssrn.com/abstract=223088

Dennis Bams (Contact Author)

University of Maastricht - Limburg Institute of Financial Economics (LIFE) ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 388 3838 (Phone)
+31 43 325 8530 (Fax)

Christian C. P. Wolff

University of Luxembourg ( email )

6, rue Richard Coudenhove-Kalergi
Kirchberg Campus
Luxembourg, South 1359
Luxembourg

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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