Term Premium and Volatility: A Nonlinear Analysis of the Swiss Interest Rates

In this paper we investigate the relationship between the term premium and the volatility of the short interest rate by applying a single equation EGARCH-in-mean model as well as bivariate seminonparametric nonlinear impulse response analysis to weekly Swiss data over the period from 1978 to 1992. The estimation results of the restrictive parametric as well as the general seminonparametric methods provide no convincing evidence for a term premium volatility relationship. Our finding indicates that the nonlinear conditional mean dynamics plays a small role in accounting for the rejection of the expectations hypothesis of the term structure of interest rates.