The Determinants of the Term Premium in the Term Structure of Interest Rates

Abstract

In support of the recent U.S evidence, the Garch methodology reveals in two fold that, the term premium is time varying and the conditional variances of the yield spread, money supply and the exchange rate determines the term premium implicit in the U.S. economy. However the impact of the conditional variance of industrial production index as a determinant of the term premium is felt only for longer maturity bonds.

Keywords: Term Premium, Yield Spread, Money Supply, Exchange Rate, Industrial Production Index.