Staff Working Paper No. 518
Shesheryar Malik and Andrew Meldrum
This paper evaluates the robustness of UK bond term premia from affine term structure models. We show that this approach is able to match standard specification tests. In addition, term premia display countercyclical behaviour and are positively related to uncertainty about future inflation, consistent with previous findings for the United States. Premia are robust to correction for small sample bias and the inclusion of macro variables as unspanned factors. Including survey information about short rate expectations, which is a common way of improving identification of affine term structure models, however, results in inferior performance using UK data, as measured by standard specification tests and the economic plausibility of the estimated premia. Finally, we show that imposing the zero lower bound within a shadow rate term structure model does not have a large impact on estimates of long-maturity term premia.