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 D. Bauer

Michael D. Bauer

Federal Reserve Bank of San Francisco

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 D. 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 D. Bauer

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

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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