Brian Romanchuk — How To Approach The Term Premium

The term premium is an important concept in fixed income analysis.

For our own analysis, there are a few ways of using the term premium. Unfortunately, there is no way of extending the analysis for an individual to the market in general, as there is no need for market participants to agree on the term premium before undertaking a transaction. As a result, we should not expect to be able to infer an average term premium implied by market pricing using any algorithm.

This article follows on from the article "The Term Premium Problem," which outlined my thinking about the term premium. I imagine that readers would be most interested in my criticisms of existing techniques to calculate the term premium. My argument is that the problem with those techniques is that they start in the wrong place; there is no technical fix as a result. Rather than attempt to criticise hundreds of complex algorithms, I will instead explain what I see as the best starting point. From that vantage point, the defects of the conventional approaches become more obvious.

Relevant to understanding the bond market and yield curve.

Bond Economics
How To Approach The Term Premium
Brian Romanchuk