A Nonlinear Expectations Model of the Term Structure of Interest Rates with Time-Varying Risk Premia

1989 ◽  
Vol 21 (3) ◽  
pp. 348 ◽  
Author(s):  
Bong-Soo Lee
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Risk Premia ◽  
Time Varying ◽  
Nonlinear Expectations

TIME-VARYING RISK PREMIA IN EMERGING MARKETS: EXPLANATION BY A MULTI-FACTOR AFFINE TERM STRUCTURE MODEL

2004 ◽  
Vol 07 (07) ◽  
pp. 919-947 ◽  
Author(s):  
CAIO IBSEN RODRIGUES DE ALMEIDA
Keyword(s):  
Emerging Markets ◽  
Interest Rates ◽  
Term Structure ◽  
Gaussian Model ◽  
Risk Premia ◽  
Time Varying ◽  
State Variables ◽  
Affine Term Structure ◽  
Term Structure Model ◽  
Developed Markets

From the empirical viewpoint, the Expectation Hypothesis Theory (EHT) of the term structure of interest rates has been extensively tested and rejected for US term structure data. Dai and Singleton [6] show that under the settings of Affine term structure models it is possible that one matches both the historical term structure dynamics and capture an important stylized fact that have contradicted the EHT: Time-varying risk premia. In emerging markets, economic conditions tend to be much less stable than in developed markets. For this reason, if risk premia is dynamic in such markets, intuition would suggest that it is more volatile than in developed markets, implying a stronger statistical rejection of the EHT. In this paper, we verify the robustness of Dai and Singleton's results under these more extreme market conditions. We estimate an arbitrage free Affine Gaussian model for the term structure of swaps in the Brazilian market. We propose an extensive empirical analysis which consists on: defining the optimal number of factors to be used in the model, estimating the model, giving interpretation to the state variables in terms of risk factors, and studying the model implied risk premia. In the end, we propose an application for risk management of interest rates futures portfolios.

Term spread regressions of the rational expectations hypothesis of the term structure allowing for risk premium effects

2015 ◽  
Vol 19 (1) ◽  
Author(s):  
Efthymios Argyropoulos ◽  
Elias Tzavalis
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Rational Expectations ◽  
Time Varying ◽  
Structure Model ◽  
Expectations Hypothesis ◽  
Term Structure Model ◽  
Term Spread ◽  
Term Premium

AbstractThis paper suggests a new empirical methodology of testing the predictions of the term spread between long and short-term interest rates about future changes of the former allowing for term premium effects, according to the rational expectations hypothesis of the term structure. To capture the effects of a time-varying term premium on the term spread, the paper relies on an empirically attractive affine Gaussian dynamic term structure model which assumes that the term structure of interest rates is spanned by three unobserved state variables. To retrieve accurate values of these variables from interest rates series, the paper suggests a new method which can overcome the effects of measurement (or pricing) errors inherent in these series on the estimates of the model. This method is assessed by a Monte Carlo study. Ignoring these errors will lead to biased estimates of term structure models. The empirical results of the paper provide support for the suggested term structure model. They show that this model can efficiently capture the time-varying term premium effects embodied in long-term interest rates, which can explain the failures of term spread to forecast future changes in long-term rates.

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