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Term premia and the maturity composition of the Federal debt: new evidence from the term structure of interest rates

✍ Scribed by Basma Bekdache

Publisher
John Wiley and Sons
Year
2001
Tongue
English
Weight
202 KB
Volume
20
Category
Article
ISSN
0277-6693

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✦ Synopsis

Abstract

This paper models bond term premia empirically in terms of the maturity composition of the federal debt and other observable economic variables in a time‐varying framework with potential regime shifts. We present regression and out‐of sample forecasting results demonstrating that information on the age composition of the Federal debt is useful for forecasting term premia. We show that the multiprocess mixture model, a multi‐state time‐varying parameter model, outperforms the commonly used GARCH model in out‐of‐sample forecasts of term premia. The results underscore the importance of modelling term premia, as a function of economic variables rather than just as a function of asset covariances as in the conditional heteroscedasticity models. Copyright © 2001 John Wiley & Sons, Ltd.

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