Modelling the Time-Varying Risk Premium by Using the Kalman Filter: the Euro Money Market Case

Fabio Filipozzi ()
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Fabio Filipozzi: Tallinn University of Technology, Estonia

Chapter 8 in FindEcon Monograph Series: Advances in Financial Market Analysis, 2011, vol. 9, pp 127-140 from University of Lodz

Abstract: Fabio Filipozzi in Chapter 8 attempts to capture risk premium in euro zone money market rates with a time-varying coefficient estimated by Kalman filter. The state space model allows for the inclusion of market risk premium which is correlated with a business cycle. The author also finds that forward rates tend to underestimate the future short-term interest rates contrarily to the conclusions of expectation hypothesis.

Keywords: Time-varying risk premium; Kalman filter; Euro money market (search for similar items in EconPapers)
JEL-codes: C01 E02 F00 G00 (search for similar items in EconPapers)
Date: 2011
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