Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/93671 
Year of Publication: 
2013
Series/Report no.: 
Staff Report No. 656
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
A small but ambitious literature uses affine arbitrage-free models to estimate jointly U.S. Treasury term premiums and the term structure of equity risk premiums. Within this approach, this paper identifies the parameter restrictions that are consistent with a simple dividend discount model, extends the cross-section to Germany and France, averages across multiple observable-factor and market prices of risk specifications, and considers alternative samples for parameter estimation. The results produce intuitive trajectories for both sets of premiums given standard samples starting from July 1993. However, the decomposition of nominal U.S. Treasury yields, but not long-run equity risk premiums, is sensitive to data beyond 2008, which raises some questions about the net effects of unconventional monetary policy measures. Nonetheless, the rotation from sharp inversion during the financial crisis to an upward-sloping term structure of equity risk premiums more recently, with modest readings at the front end, is not inconsistent with some net moderation in required compensation for equity risk in the United States.
Subjects: 
equity risk premium
Treasury term premium
affine arbitrage-free models
JEL: 
G10
G12
G13
G15
Document Type: 
Working Paper

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