Download this Paper Open PDF in Browser

Do Term Premia Affect the Predictive Power of the German Yield Curve for Future Economic Activity?

24 Pages Posted: 23 Jul 2007  

Manfred Kremer

European Central Bank (ECB)

Thomas Werner

European Central Bank (ECB)

Date Written: September 26, 2006

Abstract

This paper presents and further analyses estimated term premia for Germany as the largest euro area country. The term premia are estimated within an affine arbitrage-free term structure model with two latent factors. Survey data help anchor model-implied long-horizon expectations for interest rates which have a large bearing on estimated term premia at the long-end of the yield curve in particular. The results suggest that term premia embedded in long-term interest rates displayed some cyclical variations over time. Moreover, term premia experienced a trend decline over the sample considered (1973 to 2006), but in particular since the mid-1990s. Hence, it may principally be important to take term premia developments explicitly into account when assessing the information content of the yield curve for future economic conditions or market expectations of future short-term interest rates, for example. This paper analyses empirically whether and to which extent term premia affected the predictive power of the slope of the yield curve for economic activity in Germany.

Keywords: Yield curve, Term structure, Forecasting, Term premia, Financial markets and the macroeconomy

JEL Classification: E32, E43, E44, E47

Suggested Citation

Kremer, Manfred and Werner, Thomas, Do Term Premia Affect the Predictive Power of the German Yield Curve for Future Economic Activity? (September 26, 2006). Available at SSRN: https://ssrn.com/abstract=995774 or http://dx.doi.org/10.2139/ssrn.995774

Manfred Kremer (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 7065 (Phone)

Thomas Werner

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Paper statistics

Downloads
104
Rank
220,013
Abstract Views
508