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Term Premium and Quantitative Easing in a Fractionally Cointegrated Yield Curve

Author

Listed:
  • Mirko Abbritti

    (University of Navarra)

  • Hector Carcel

    (Bank of Lithuania)

  • Luis Gil-Alana

    (University of Navarra)

  • Antonio Moreno

    (University of Navarra)

Abstract

The co-movement of US sovereign rates suggests a long-run common stochastic trend. Traditional cointegrated systems need to assume that interest rates are unit roots and thus imply non-stationary and non-mean-reverting dynamics. Based on recent econometric developments, we postulate and estimate a fractional cointegrated model (FCVAR) which allows for a mean-reverting stochastic trend. Our results point to the presence of such mean-reverting fractional cointegration among sovereign rates. The implied term premium is less volatile than the classic I(0) stationary and I(1) unit root models. Our analysis highlights the role of real factors (but not in flation) in shaping term premium dynamics. We further identify the dynamic effects of quantitative easing policies on our identified term premium. In contrast to the stationary-implied term premium, we find a significant term premium decline following these large-scale asset purchase programs.

Suggested Citation

  • Mirko Abbritti & Hector Carcel & Luis Gil-Alana & Antonio Moreno, 2018. "Term Premium and Quantitative Easing in a Fractionally Cointegrated Yield Curve," Bank of Lithuania Working Paper Series 50, Bank of Lithuania.
  • Handle: RePEc:lie:wpaper:50
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    File URL: https://www.lb.lt/en/publications/no-50-mirko-abbritti-hector-carcel-luis-gil-alana-antonio-moreno-term-premium-and-quantitative-easing-in-a-fractionally-cointegrated-yield-curve-1
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    More about this item

    Keywords

    U.S. yield curve; stochastic trend; fractional cointegration; term premium; quantitative easing;

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G1 - Financial Economics - - General Financial Markets

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