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Interest Term Premiums and C-CAPM: A Test of a Parsimonious Model

Author

Listed:
  • Hubert de La Bruslerie

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique)

  • Jessica Fouilloux

    (IGR-IAE Rennes - Institut de Gestion de Rennes - Institut d'Administration des Entreprises - Rennes - UR - Université de Rennes, CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper proposes a consumption-based model that accounts for term premiums of the nominal term structure of interest rates. The model focuses on ex ante term premiums, which depend on the volatility processes of real consumption and inflation. The contribution of the paper is to derive and test a parsimonious model that highlights linear relationship between term premiums and next period conditional volatilities. When calibrated to US data on interest rates, consumption and inflation, the model accounts for the C-CAPM expectations puzzle. Risk aversion coefficients between 2 and 7 are elicited.

Suggested Citation

  • Hubert de La Bruslerie & Jessica Fouilloux, 2015. "Interest Term Premiums and C-CAPM: A Test of a Parsimonious Model," Post-Print halshs-01101997, HAL.
    • Handle: RePEc:hal:journl:halshs-01101997
    DOI: 10.3917/fina.353.0097
    as

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