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

21 Pages Posted: 6 Sep 2013 Last revised: 27 Sep 2013

See all articles by Michael Bauer

Michael Bauer

Universit├Ąt Hamburg

Glenn D. Rudebusch

Federal Reserve Bank of San Francisco

Jing Cynthia Wu

University of Notre Dame - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 24, 2013

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

Suggested Citation

Bauer, Michael and Rudebusch, Glenn D. and Wu, Jing Cynthia, Comment on 'Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset' (April 24, 2013). American Economic Review, Forthcoming; Chicago Booth Research Paper No. 13-74. Available at SSRN: https://ssrn.com/abstract=2321277

Michael Bauer

Universit├Ąt Hamburg ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

HOME PAGE: http://www.michaeldbauer.com

Glenn D. Rudebusch

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Jing Cynthia Wu (Contact Author)

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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