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Estimating the Term Premium From A Gaussian Dynamic Term Structure Model – The Case of Romania

Author

Listed:
  • Alexie ALUPOAIEI

    (The Romanian-American University, Bucharest)

  • Matei KUBINSCHI

    (The Bucharest University of Economic Studies)

  • Adam ALTĂR-SAMUEL

    (The Romanian-American University, Bucharest)

Abstract

The present article aims at deriving the time-varying term premium in a Gaussian Dynamic Term Structure (GDTSM) framework, using yield curve information for Romania’s sovereign debt instruments. Currently, empirical literature on term structure models is relatively scarce for CESEE economies due to the degree of financial market development and, consequently, the limited market data availability. Therefore, our approach contributes to this line of research by estimating the model using term structure data starting from 2011 and comparing the results with public information on term premia published by the Federal Reserve. We find that the term premium estimated for Romania generally follows international dynamics, signaling a high degree of sensitivity to external events, with several episodes of diverging behavior largely explained by internal factors. Finally, we analyzed the ways in which the term premium can been used for macro-financial purposes. In this regard, we investigated the manner in which the information set carried by the evolution of term premium can been exploited for predictability of the industrial production, CPI and private credit, as proxies for the business cycles, monetary policy stance and financial cycle/macroprudential stance.

Suggested Citation

  • Alexie ALUPOAIEI & Matei KUBINSCHI & Adam ALTĂR-SAMUEL, 2017. "Estimating the Term Premium From A Gaussian Dynamic Term Structure Model – The Case of Romania," ECONOMIC COMPUTATION AND ECONOMIC CYBERNETICS STUDIES AND RESEARCH, Faculty of Economic Cybernetics, Statistics and Informatics, vol. 51(4), pages 173-188.
    • Handle: RePEc:cys:ecocyb:v:50:y:2017:i:4:p:173-188
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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