Figure
shows Kim and Wright term premium and the US 10 yrs itself. Movement during January
was in the premium and, in some sense, not related to the economic performance
(which should change the rate expectation). Bodes well with the Emerging Market
driven risk aversion increase story. But I’m not sure what to do. If movement
was NOT in the term premium I would challenge it, and pay rates. I guess I’m
going to take a nap instead.
"Unlike Kim and Wright, they show standard errors of the parameter estimates. They should scare you if you are thinking about using these sorts of numbers to make real life decisions." I think I agree with that.
ReplyDeleteGood to have you on board. I guess the right question is: suppose you HAVE to make a decision, and know a large fraction of fixed income investors look at this term premium, would you take into account or not?
DeleteYes I would. The premium calculation is tough though. There are several approaches and they can produce different results. I like this method better: http://www.stanford.edu/~piazzesi/cp.pdf
ReplyDelete