Bank of Lithuania
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2018-07-30

No 50. Mirko Abbritti, Hector Carcel, Luis Gil-Alana, Antonio Moreno. Term premium and quantitative easing in a fractionally cointegrated yield curve

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4.5

The co-movement of US sovereign rates suggests a long-run common stochastic trend. Traditional cointegrated systems need to assume that interest rates are unit roots and thus imply non-stationary and non-mean-reverting dynamics. Based on recent econometric developments, we postulate and estimate a fractional cointegrated model (FCVAR) which allows for a mean-reverting stochastic trend. Our results point to the presence of such mean-reverting fractional cointegration among sovereign rates. The implied term premium is less volatile than the classic I(0) stationary and I(1) unit root models. Our analysis highlights the role of real factors (but not inflation) in shaping term premium dynamics. We further identify the dynamic effects of quantitative easing policies on our identified term premium. In contrast to the stationary-implied term premium, we find a significant term premium decline following these large-scale asset purchase programs.

JEL Codes: C2, C3, E4, G1.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.