Term Premia in Norwegian Interest Rate Swaps

Abstract

Fundamentally, the term premium in long-term nominal yields is compensation to investors for bearing interest rate risk. There is substantial evidence of sizable and time-varying term premia. As opposed to yields, term premia are not directly observable. In this paper, we estimate term premia in Norwegian interest rate swaps from a set of dynamic term structure models, covering the period from 2001/04 until 2022/06. In line with international studies, we find evidence of declining term premia over the sample period. Furthermore, our estimates indicate that term premia have been close to zero, as well as negative in periods, during the last decade of global extraordinary monetary policy measures. We find that the recent rise in Norwegian interest rate swaps is partly caused by increases in term premia. From a practitioner’s perspective, our term premia estimates can be utilized as part of applied management of both investment and debt portfolios.