Term Premia in Norwegian Government Bond Yields

Abstract

The typically observed upward sloping nominal yield curve implies that investors demand positive risk premia – or term premia – to hold long-term nominal bonds. Fundamentally, the term premium is compensation to investors for bearing interest rate risk and a component in the term structure of yields. There is substantial evidence of sizeable and time-varying term premia. As opposed to yields, term premia are not directly observable. In this paper we estimate term premia in Norwegian government bond yields from a set of dynamic term structure models (DTSM), covering the period from 2003/01 until 2021/04. In line with international studies, we find evidence of declining term premia over the sample period.