Term Premia in Norwegian Interest Rate Swaps

Petter Eilif de Lange, Morten Risstad (), Kristian Semmen and Sjur Westgaard
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Petter Eilif de Lange: Department of International Business, Faculty of Economics and Management, Norwegian University of Science and Technology (NTNU), 6001 Ålesund, Norway
Morten Risstad: Department of Industrial Economics and Technology Management, Faculty of Economics and Management, Norwegian University of Science and Technology (NTNU), 7034 Trondheim, Norway
Kristian Semmen: Sparebank 1 Markets, 7004 Trondheim, Norway
Sjur Westgaard: Department of Industrial Economics and Technology Management, Faculty of Economics and Management, Norwegian University of Science and Technology (NTNU), 7034 Trondheim, Norway

JRFM, 2023, vol. 16, issue 3, 1-19

Abstract: Fundamentally, the term premium in long-term nominal yields is compensation to investors for bearing interest rate risk. There is substantial evidence of sizable and time-varying term premia. As opposed to yields, term premia are not directly observable. In this paper, we estimate term premia in Norwegian interest rate swaps from a set of dynamic term structure models, covering the period from 2001/04 until 2022/06. In line with international studies, we find evidence of declining term premia over the sample period. Furthermore, our estimates indicate that term premia have been close to zero, as well as negative in periods, during the last decade of global extraordinary monetary policy measures. We find that the recent rise in Norwegian interest rate swaps is partly caused by increases in term premia. From a practitioner’s perspective, our term premia estimates can be utilized as part of applied management of both investment and debt portfolios.

Keywords: yield curve modeling; dynamic term structure models; term premia (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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