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Term premia and the maturity composition of the Federal debt: new evidence from the term structure of interest rates
Author(s) -
Bekdache Basma
Publication year - 2001
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.805
Subject(s) - heteroscedasticity , econometrics , economics , term (time) , risk premium , maturity (psychological) , yield curve , autoregressive conditional heteroskedasticity , asset (computer security) , sample (material) , debt , bond , financial economics , finance , volatility (finance) , computer science , psychology , developmental psychology , chemistry , physics , computer security , chromatography , quantum mechanics
This paper models bond term premia empirically in terms of the maturity composition of the federal debt and other observable economic variables in a time‐varying framework with potential regime shifts. We present regression and out‐of sample forecasting results demonstrating that information on the age composition of the Federal debt is useful for forecasting term premia. We show that the multiprocess mixture model, a multi‐state time‐varying parameter model, outperforms the commonly used GARCH model in out‐of‐sample forecasts of term premia. The results underscore the importance of modelling term premia, as a function of economic variables rather than just as a function of asset covariances as in the conditional heteroscedasticity models. Copyright © 2001 John Wiley & Sons, Ltd.