Canonical term-structure models with observable factors and the dynamics of bond risk premiums

Marcello Pericoli () and Marco Taboga ()

No 580, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research Department

Abstract: We study the dynamics of risk premiums on the German bond market, employing no-arbitrage term-structure models with both observable and unobservable state variables, recently popularized by Ang and Piazzesi (2003). We conduct a specification analisys based on a new canonical representation for this class of models. We find that risk premiums display a considerable variability over time, are strongly counter-cyclical and bear no significant relation to inflation.

Keywords: term structure models; yield curve; risk premium (search for similar items in EconPapers)
JEL-codes: C5 G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-fmk
Date: 2006-02
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