Term Premia: Models and Some Stylised Facts

13 Pages Posted: 30 Nov 2018

See all articles by Benjamin H. Cohen

Benjamin H. Cohen

Bank for International Settlements (BIS)

Peter Hördahl

Bank for International Settlements (BIS)

Fan Dora Xia

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: September 1, 2018

Abstract

We review methods and models for estimating term premia on long-term government bonds. We then use these models to estimate term premia on US and euro area bonds and explore their recent behaviour. Although the models produce different estimates for the level of term premia, they largely concur on the trends and dynamics. While low (and sometimes negative) term premia have helped to keep yields unusually low, recent yield movements have tended to reflect shifts in expected short-term rates rather than in the premia. We find that co-movements in real term premia (rather than inflation risk premia or expected rates) have contributed to co- ovements between yields in the United States and the euro area.

JEL Classification: G10, G12

Suggested Citation

Cohen, Benjamin H. and Hoerdahl, Peter and Xia, Fan Dora, Term Premia: Models and Some Stylised Facts (September 1, 2018). BIS Quarterly Review September 2018, Available at SSRN: https://ssrn.com/abstract=3288099

Benjamin H. Cohen (Contact Author)

Bank for International Settlements (BIS) ( email )

Basel
Switzerland

Peter Hoerdahl

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Fan Dora Xia

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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