Time-varying Term Premia and the Behavior of Forward Interest Rate Prediction Errors
Sridhar Iyer
Abstract
Sridhar Iyer
Abstract
In this paper I examine the time-varying expected term premium argument for the failure of the expectations hypothesis of the term structure of U.S. interest rates. Using an unobserved components model to estimate expected term premiums from March 1951 to January 1991, I find considerable variation in estimated premiums and significant persistence in their volatility over time.
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In this paper I examine the time-varying expected term premium argument for the failure of the expectations hypothesis of the term structure of U.S. interest rates. Using an unobserved components model to estimate expected term premiums from March 1951 to January 1991, I find considerable variation in estimated premiums and significant persistence in their volatility over time.
Key concepts: Econometrics, Term (time), Economics, Volatility (finance), Forward rate, Yield curve, Interest rate, Risk premium