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Bond Term Premium Analysis in the Presence of Multiple Regimes

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  • RON GUIDO
  • KATHLEEN WALSH

Abstract

This papers addresses whether observed violations in the liquidity preference hypothesis (LPH) can be explained by the presence of multiple regimes in the term premia. The investigation directly tests the LPH via a series of inequality tests which allow the moments to be conditioned on observable information using an instrumental variables approach. The apparent rejection of the LPH is then investigated by modeling the term premia over time using a simple Bayesian Markov mixture model. The results suggest the presence of time varying term premia and multiple regimes which may explain the apparent violations of the LPH.

Suggested Citation

  • Ron Guido & Kathleen Walsh, 2005. "Bond Term Premium Analysis in the Presence of Multiple Regimes," International Review of Finance, International Review of Finance Ltd., vol. 5(1‐2), pages 31-54, March.
    • Handle: RePEc:bla:irvfin:v:5:y:2005:i:1-2:p:31-54
    DOI: 10.1111/j.1468-2443.2006.00050.x
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    References listed on IDEAS

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    1. Reuben A. Kessel, 1965. "The Cyclical Behavior of the Term Structure of Interest Rates," NBER Books, National Bureau of Economic Research, Inc, number kess65-1, March.
    2. Kathleen D. Walsh, 2006. "Is the Ex Ante Risk Premium Always Positive? Further Evidence," Australian Journal of Management, Australian School of Business, vol. 31(1), pages 93-113, June.
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    Cited by:

    1. Vijay A Murik, 2013. "Measuring monetary policy expectations," Australian Journal of Management, Australian School of Business, vol. 38(1), pages 49-65, April.

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