A SVECM Model of the UK Economy and the Term Premium

28 Pages Posted: 2 Aug 2011

See all articles by Mardi H. Dungey

Mardi H. Dungey

University of Tasmania (deceased); Financial Research Network (FIRN) (deceased)

Tugrul Vehbi

affiliation not provided to SSRN

Date Written: August 1, 2011

Abstract

The term premium is estimated from an empirically coherent open economy VAR model of the UK economy where the model specifically accounts for the mixed nature of the data and cointegration between some variables. Using this framework the estimated negative term premia for 1980-2007 is decomposed into its contributing shocks, where the role of inflation and monetary policy shocks are shown to be dominant in the evolution of the term premium. Projecting into the 2008 crisis period reveals the extent of the shocks to the UK economy, and also shows the similarities in term premia behaviour with those experienced during the 1998 Russian crisis.

Keywords: Structural VECM Models, Term Premium, Crisis

JEL Classification: E43, E52, C51, C32

Suggested Citation

Dungey, Mardi H. and Vehbi, Tugrul, A SVECM Model of the UK Economy and the Term Premium (August 1, 2011). Available at SSRN: https://ssrn.com/abstract=1903533 or http://dx.doi.org/10.2139/ssrn.1903533

Mardi H. Dungey (Contact Author)

University of Tasmania (deceased)

Financial Research Network (FIRN) (deceased)

Tugrul Vehbi

affiliation not provided to SSRN ( email )

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