Skip to Main content Skip to Navigation
Journal articles

Term structure of interest rates: modelling the risk premium using a two horizons framework

Abstract : We propose a two-horizon interest rate term structure model where the maturity of the riskless rate is the one of the debt security whose duration equals investor's desired horizon. Our framework thus relaxes the usual assumptions of the literature that the riskless rate is unchangingly the short period rate. A representative investor compares at each of the 3and the 6-month horizons the risk premium offered by the market and the one they require to take a risky position, the latter premium being determined by the portfolio choice theory. Due to market frictions, the deviation between the offered and required risk premium evolves according to a mean-reverting process. Using 3-month ahead survey-based expectations of the US 3-month Treasury Bill rate, we employ Kalman filtering to estimate the market risk premium where the preference parameter of investors for alternative horizons is time-varying. We find that the market comprises both a group of agents with 3-month preferred horizon and a group of agents with 6-month preferred horizon with a weigh of two-thirds for the first group.
Complete list of metadata

https://hal.archives-ouvertes.fr/hal-03319099
Contributor : Remzi Uctum Connect in order to contact the contributor
Submitted on : Wednesday, August 11, 2021 - 4:09:16 PM
Last modification on : Wednesday, October 27, 2021 - 11:16:52 AM
Long-term archiving on: : Friday, November 12, 2021 - 7:25:10 PM

File

papier complet.pdf
Files produced by the author(s)

Identifiers

Citation

Georges Prat, Remzi Uctum. Term structure of interest rates: modelling the risk premium using a two horizons framework. Journal of Economic Behavior and Organization, Elsevier, 2021, 182, pp.421-436. ⟨10.1016/j.jebo.2019.09.006⟩. ⟨hal-03319099⟩

Share

Metrics

Les métriques sont temporairement indisponibles