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

Abstract

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 macro-economic determinants of the term premia estimated in Wright (2011). His term premium estimates are essentially a-cyclical, and often just parallel the secular trend in long-term interest rates. In contrast, bias-corrected term premia show pronounced counter-cyclical behavior, consistent with theoretical and empirical arguments about movements in risk premia.

Keywords: term premia, dynamic term structure model, small-sample bias

JEL Classification: E43, E44