Short and Long Horizon Term and Inflation Risk Premia in the Us Term Structure: Evidence from an Integrated Model for Nominal and Real Bond Prices Under Regime Shifts

We provide an integrated utility-based model for nominal and index-linked bonds for the case where the CPI and real consumption follow a joint lognormal - regime shift model. Working both in continuous and in discrete time, we discuss a systematic bias in the computation of term and inflation risk premia. We fit the model to the time series of fundamentals and short and long yields to find (i) a low coefficient of risk aversion, (ii) term premia that switch sign over time at both the short and long horizon, (iii) always positive inflation risk premia, although very low in recent times, (iv) quite variable real rates both at the short horizon and at the long horizon.