Estimating the Term Premium From A Gaussian Dynamic Term Structure Model – The Case of Romania

Alexie Alupoaiei, Matei Kubinschi and Adam Altăr-Samuel
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Alexie Alupoaiei: The Romanian-American University, Bucharest
Matei Kubinschi: The Bucharest University of Economic Studies
Adam Altăr-Samuel: The Romanian-American University, Bucharest

ECONOMIC COMPUTATION AND ECONOMIC CYBERNETICS STUDIES AND RESEARCH, 2017, vol. 51, issue 4, 173-188

Abstract: The present article aims at deriving the time-varying term premium in a Gaussian Dynamic Term Structure (GDTSM) framework, using yield curve information for Romania’s sovereign debt instruments. Currently, empirical literature on term structure models is relatively scarce for CESEE economies due to the degree of financial market development and, consequently, the limited market data availability. Therefore, our approach contributes to this line of research by estimating the model using term structure data starting from 2011 and comparing the results with public information on term premia published by the Federal Reserve. We find that the term premium estimated for Romania generally follows international dynamics, signaling a high degree of sensitivity to external events, with several episodes of diverging behavior largely explained by internal factors. Finally, we analyzed the ways in which the term premium can been used for macro-financial purposes. In this regard, we investigated the manner in which the information set carried by the evolution of term premium can been exploited for predictability of the industrial production, CPI and private credit, as proxies for the business cycles, monetary policy stance and financial cycle/macroprudential stance.

Keywords: term structure; term premium; macro-financial linkages; monetary policy; macroprudential policy (search for similar items in EconPapers)
JEL-codes: E43 E52 G28 (search for similar items in EconPapers)
Date: 2017
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