Term premium: Dynamics with estimation bias correction
Published:
Aug 16, 2025
Volume:
23
Keywords:
Yield curve
Affine term structure model
Term premium
Small sample bias correction
Abstract
This paper employs an arbitrage-free affine dynamic term structure model, incorporating a bias correction in the estimation of factor dynamics, to model the Brazilian yield curve and decompose interest rates into expectations of future short-term rates and the term premium, which compensates investors for the risk associated with holding long-term bonds. The study uses data from Brazilian Interbank Deposit Futures Contracts from December 2005 to July 2024, covering maturities ranging from one month to ten years. The results suggest that the model performs well in capturing both the risk-neutral and real-world dynamics of Brazilian interest rates, allowing for an analysis of the behavior of the term premium across the entire maturity spectrum analyzed. Additionally, the bias correction indicates that the volatility of the risk-neutral rate is usually underestimated.
How to cite
Milene Maiser Moraes, João Frois Caldeira. Term premium: Dynamics with estimation bias correction. Brazilian Review of Finance, v. 23, n. 1, 2025. p. e202513. DOI: 10.12660/rbfin.v23n1.2025.93720.
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