EUTERPE · Estimation of the term premium in Euro Area government bonds

Estimation of the term premium in Euro Area government bonds

The Great Financial Crisis and, more recently, the pandemic emergency have posed new challenges to the European Central Bank, which has been forced to adopt unconventional monetary policy measures, such as negative interest rates and asset purchases, in order to stabilize financial markets and stimulate economic growth. In this context, a clear understanding of the forces underlying the movements in interest rates has become a timely and very relevant issue. However, disentangling risk premia from expectations of future interest rates in the determinants of the term structure of interest rates has long been a challenge, not only to financial economists but to policymakers. The purpose of the EUTERPE (EUropean TERm Premium Estimation) research project is to implement an innovative system producing timely and reliable estimates of the term premium and its components for government bonds of the Euro Area (EA). In particular, the project develops new different measures for the investors’ perceived risk of holding EA government bonds that take into account the interrelation between bond yields and macro, volatility and global factors. Therefore, the research project intends not only to deliver an academic contribution but also has the ambition to produce a new analytical tool with various applications in the practice of European policymakers and the financial industry. All the results which were expected from the empirical application of the model have been obtained. In particular: i) long-term time series for the term structure of term premia, inflation and real risk premia, real interest rates and inflation expectations for each EA country; ii) a timely update of the estimated term premium and its components for EA government bonds; iii) measures for the sensitivity of the term premium and its components to shocks in macro, volatility and global factors; iv) a series of indicators for the exposure of EA government bonds to macro risk, volatility risk, and global risk; v) a timely update of the estimated term structure of real interest rates and inflation expectations; vi) a practical tool to analyse the co-movement of term premia, calculate their degree of connectedness and build the implied network structure. These results are contained both in the articles produced by the research activity and in the website dedicated to the project.

Текст от CORDIS, на английски · Данни: CORDIS, © Европейски съюз