Nominal Term Structure and Term Premia. Evidence from Chile

Ceballos, Luis and Naudon, Alberto and Romero, Damian (2014): Nominal Term Structure and Term Premia. Evidence from Chile.

Abstract

The downward trend exhibited in Chile’s nominal term structure since 2003 has been a common pattern shared by other developed and developing economies. To understand the behavior of the nominal yield curve in Chile, we rely on an affine dynamic term structure model (DTMS) which allows to decompose the term structure into the expected short-term premium (related to the monetary policy expectation) and a term premia. We show that most of the fall of long-term interest rates as well as its dynamics are related to the term premia rather than the expected short-term interest rate. With this, we report that the term premia is driven primarily by nominal uncertainty, i.e. the uncertainty for expected inflation and the US term premia.

• Item Type: MPRA Paper
• Language: English
• Keywords: Term premium; Chile; Yield curve; Risk neutral rates
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt ; Debt Management ; Sovereign Debt

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