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Term Premia in Norwegian Interest Rate Swaps

Author

Listed:
  • Petter Eilif de Lange

    (Department of International Business, Faculty of Economics and Management, Norwegian University of Science and Technology (NTNU), 6001 Ålesund, Norway)

  • Morten Risstad

    (Department of Industrial Economics and Technology Management, Faculty of Economics and Management, Norwegian University of Science and Technology (NTNU), 7034 Trondheim, Norway
    Sparebank 1 Markets, 7004 Trondheim, Norway)

  • Kristian Semmen

    (Sparebank 1 Markets, 7004 Trondheim, Norway)

  • Sjur Westgaard

    (Department of Industrial Economics and Technology Management, Faculty of Economics and Management, Norwegian University of Science and Technology (NTNU), 7034 Trondheim, Norway)

Abstract

Fundamentally, the term premium in long-term nominal yields is compensation to investors for bearing interest rate risk. There is substantial evidence of sizable and time-varying term premia. As opposed to yields, term premia are not directly observable. In this paper, we estimate term premia in Norwegian interest rate swaps from a set of dynamic term structure models, covering the period from 2001/04 until 2022/06. In line with international studies, we find evidence of declining term premia over the sample period. Furthermore, our estimates indicate that term premia have been close to zero, as well as negative in periods, during the last decade of global extraordinary monetary policy measures. We find that the recent rise in Norwegian interest rate swaps is partly caused by increases in term premia. From a practitioner’s perspective, our term premia estimates can be utilized as part of applied management of both investment and debt portfolios.

Suggested Citation

  • Petter Eilif de Lange & Morten Risstad & Kristian Semmen & Sjur Westgaard, 2023. "Term Premia in Norwegian Interest Rate Swaps," JRFM, MDPI, vol. 16(3), pages 1-19, March.
    • Handle: RePEc:gam:jjrfmx:v:16:y:2023:i:3:p:188-:d:1093268
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    References listed on IDEAS

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