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Uncovering the US term premium: An alternative route

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

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.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 36 (2012)
Issue (Month): 4 ()
Pages: 1181-1193

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Handle: RePEc:eee:jbfina:v:36:y:2012:i:4:p:1181-1193
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