Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/240707 
Year of Publication: 
2020
Series/Report no.: 
Working Papers No. 2020-18
Publisher: 
Banco de México, Ciudad de México
Abstract: 
We estimate the term premium implicit in 10-year Mexican government bonds from 2004 to 2019, and analyze the main determinants explaining its dynamics. To do so, we decompose the longterm interest rate into its two components: the expected short-term interest rate and the term premium. The results show that the Mexican term premium increased significantly during three episodes: i) the global financial crisis; ii) the "Taper Tantrum"; and iii) the U.S. presidential election of 2016. In contrast, the term premium decreased, to historically low levels, during the U.S. "Quantitative Easing" and the "Operation Twist" programs. Additionally, we find that the main determinants that explain the dynamics of the premium are the compensation for FX risk (as a proxy of inflationary risk premium), the real compensation, and the U.S. term premium.
Subjects: 
Term premium
expected short-term interest rate
affine model
JEL: 
G12
E43
C12
C53
Document Type: 
Working Paper
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