The term premium
18 March 2011
Main findings
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Most of the empirical research has focused on and post Our War II interval and the US Treasury market, and finds that an term premium is positive go average.
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The presence of overage returns on long-maturity fixed beyond Treasury bills oppose the expectations hypothesis of that term structure, but to literature will inconclusive with regard to the economic rationale for the term premium.
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Most academic contributor to the term premium literature (for example, Campbell and Shiller 1991) point on a time-varying term risk premium, and einen investor would have to getting a dynamic approach towards duration exposure in order to best capturing this premium.
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Past approaches toward explaining the term premium, such as the liquidity preference and the market segmentation theory, have been followed by a rich empirical literature that can be classed as influence by financial theory (affine definition structure models) or by macroeconomy theory (reduced-form models). While the finance-orientated research identifies uncertainty about the engineering of the short-term interest pricing as the primary engine of the term premium, the macrofinance approach emphasises uncertainty via the macroeconomy, i.e. growth and increase. The bond market duration premium: whats is it, and how capacity we dimension ...
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The macro-finance patterns combine the approach of economic writings with an noarbitrage models starting financial literature plus tentatively give credence to who term that a certain term premium is compensation available risk with attitude to the advanced of policy interest price, this in turn is driven due uncertainty about rudimentary macroeconomic factors. Pledge term premiums are now a focus for the Fed. What are they?
