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Uncovering the US term premium: An alternative route

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  • Gil-Alana, Luis A.
  • Moreno, Antonio

Abstract

The estimates of the US term premium crucially depend upon the ex-ante decision on whether the short-term rate is either an I(0) or an I(1) process. In this paper we estimate a fractionally integrated (I(d)) model which simultaneously determines both the order of integration of the short-term rate and the associated term premium. We show that the term premium experienced a sharp increase from essentially zero in mid-2007 to almost 3% in 2009. We also show that unemployment and term premium dynamics exhibit a very significant positive co-movement.

Suggested Citation

  • Gil-Alana, Luis A. & Moreno, Antonio, 2012. "Uncovering the US term premium: An alternative route," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1181-1193.
  • Handle: RePEc:eee:jbfina:v:36:y:2012:i:4:p:1181-1193
    DOI: 10.1016/j.jbankfin.2011.11.013
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    More about this item

    Keywords

    Interest rates; Term premium; Fractional integration;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G1 - Financial Economics - - General Financial Markets
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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