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Bond Risk Premia and Restrictions on Risk Prices

Author

Listed:
  • Constantino Hevia

    (Department of Economics, Universidad Torcuato Di Tella, Buenos Aires 1428, Argentina)

  • Martin Sola

    (Department of Economics, Universidad Torcuato Di Tella, Buenos Aires 1428, Argentina)

Abstract

Researchers who estimate affine term structure models often impose overidentifying restrictions (restrictions on parameters beyond those necessary for identification) for a variety of reasons. While some of those restrictions seem to have minor effects on the extracted factors and some measures of risk premia, such as the forward risk premium, they may have a large impact on other measures of risk premia that is often ignored. In this paper, we analyze how apparently innocuous overidentifying restrictions imposed on affine term structure models can lead to large differences in several measures of risk premiums.

Suggested Citation

  • Constantino Hevia & Martin Sola, 2018. "Bond Risk Premia and Restrictions on Risk Prices," JRFM, MDPI, vol. 11(4), pages 1-22, October.
    • Handle: RePEc:gam:jjrfmx:v:11:y:2018:i:4:p:60-:d:173588
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    References listed on IDEAS

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    Cited by:

    1. Yiu-Kuen Tse, 2019. "Editorial for the Special Issue on Financial Econometrics," JRFM, MDPI, vol. 12(3), pages 1-2, September.

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    More about this item

    Keywords

    bond risk premia; affine term structure models; risk prices;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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