Interest Term Premiums and C-CAPM: A Test of a Parsimonious Model

Hubert de La Bruslerie and Jessica Fouilloux ()

Finance, 2014, vol. 35, issue 3, 97-145

Abstract: This paper proposes a consumption-based model that accounts for term premiums of the nominal term structure of interest rates. The model focuses on ex ante term premiums, which depend on the volatility processes of real consumption and inflation. The contribution of the paper is to derive and test a parsimonious model that highlights linear relationship between term premiums and next period conditional volatilities. When calibrated to US data on interest rates, consumption and inflation, the model accounts for the C-CAPM expectations puzzle. Risk aversion coefficients between 2 and 7 are elicited.

Date: 2014
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Related works:
Working Paper: Interest Term Premiums and C-CAPM: A Test of a Parsimonious Model (2015)
Working Paper: Interest Term Premiums and C-CAPM: A Test of a Parsimonious Model (2010)
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