Essays on term structure models
Abstract
Estimating risk premia has been at the forefront of the financial
economics’ literature due to their informational content. Risk premia are
of particular interest to academics, policymakers and practitioners given
the information they disclose on expected asset returns for a given level
of risk, their contribution in asset pricing and their ability to disentangle
the different sources of risk. However, risk premia are unobserved and
their estimates strongly differ from one study to another, as they are
highly sensitive to the specification of the underlying model, sparking
hence a strong interest in their analysis. The aim of the thesis is to
estimate risk premia in a dynamic term structure model setting. The
first part of the thesis comprises of an overview of a particular class of
dynamic term structure models, namely affine term structure models.
The overview will include important concepts and definitions. The
second part of the thesis uses a risk-averse formulation of the uncovered
interest rate parity to determine exchange rates through interest rate
differentials, and ultimately extract currency risk premia. The method
proposed consists of developing an affine Arbitrage-Free class of dynamic
Nelson-Siegel term structure models (AFNS) with stochastic volatility
to obtain the domestic and foreign discount rate variations, which in
turn are used to derive a representation of exchange rate depreciations
and risk premia. The third part of the thesis studies both the nominal
and real UK term structure of interest rates using a Gaussian dynamic
term structure model, which imposes the non-negativity of nominal short
maturity rates. Estimates of the term premia, inflation risk premia and
market-implied inflation expectations are provided.
Authors
Mouabbi, SarahCollections
- Theses [4201]