Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society
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Journal of Economic Theory and Econometrics
Journal of the Korean Econometric Society

#### Term Premia in Affine Term Structure Models with Unspanned Macroeconomic Factors: the Case of KoreaVol.31, No.2, June 2020, 70–110

English Version |  Korean Version
• #### Jaeho Yun   (Ewha Womans University)

Abstract

Using the yield data for Korean government bonds, I examine several discrete-time affine term structure models with unspanned macro factors, such as output and inflation, and compares term premia implied from alternative models with different combinations of output and inflation variables. Empirical analysis shows that, except for 1-year maturity ones, there is little difference among the medium- to long-term term premia across alternative models. The model-implied term premium estimates do not show a significant pro- or counter-cyclicality in relation to output variables, but show a highly positive correlation with inflation variables. In addition, I test the traditional expectation hypothesis by fitting Campbell-Shiller long-rate regressions to the Korean bond data, the expectation hypothesis is strongly rejected as in the case of the US, due to time-varying term premia, and an additional Monte Carlo simulation study indicates that the term structure models considered in this paper show a success in matching the regression coefficients estimated from the sample.

Keywords
Korean Government Bond, Affine Term Structure Model with Unspanned Macro Factors, Term Premia, Expectation Hypothesis

JEL classification codes
E4, G2
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