Term premium in a fractionally cointegrated yield curve

Mirko Abbritti, Hector Carcel, Luis Gil-Alana and Antonio Moreno

Journal of Banking & Finance, 2023, vol. 149, issue C

Abstract: The co-movement of US Treasury yields suggests a long-run equilibrium relationship. Traditional cointegrated systems need to assume that interest rates are unit roots and thus implying non-stationary and non-mean-reverting dynamics. We postulate and estimate a fractional cointegrated model (FCVAR) which allows for mean reverting though highly persistent patterns. Our results point to the existence of such mean-reverting fractional cointegration among Treasury yields. In terms of out-of-sample forecasting, the FCVAR soundly beats the I(0) VAR model across interest rate maturities and horizons and the I(1) cointegrated VAR across maturities and short-horizons. The implied US term premium –across different maturities– proves to be quite robust across subsamples and is less volatile than the classical I(0) stationary and I(1) unit root models. Our analysis highlights the role of real factors in shaping term premium dynamics and is extended to the UK and Germany yield curves.

Keywords: U.S. yield curve; Long-run relation; Fractional cointegration; Term premium; International yield curves (search for similar items in EconPapers)
JEL-codes: C2 C3 E4 G1 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:149:y:2023:i:c:s0378426623000171

DOI: 10.1016/j.jbankfin.2023.106777

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