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Estimation of the term premium in Euro Area government bonds

Periodic Reporting for period 1 - EUTERPE (Estimation of the term premium in Euro Area government bonds)

Reporting period: 2018-04-01 to 2020-03-31

The Great Financial Crisis and, more recently, the pandemic emergency have posed new challenges to the European Central Bank, which has been forced to adopt unconventional monetary policy measures, such as negative interest rates and asset purchases, in order to stabilize financial markets and stimulate economic growth. In this context, a clear understanding of the forces underlying the movements in interest rates has become a timely and very relevant issue. However, disentangling risk premia from expectations of future interest rates in the determinants of the term structure of interest rates has long been a challenge, not only to financial economists but to policymakers.
The purpose of the EUTERPE (EUropean TERm Premium Estimation) research project is to implement an innovative system producing timely and reliable estimates of the term premium and its components for government bonds of the Euro Area (EA). In particular, the project develops new different measures for the investors’ perceived risk of holding EA government bonds that take into account the interrelation between bond yields and macro, volatility and global factors. Therefore, the research project intends not only to deliver an academic contribution but also has the ambition to produce a new analytical tool with various applications in the practice of European policymakers and the financial industry.
All the results which were expected from the empirical application of the model have been obtained. In particular: i) long-term time series for the term structure of term premia, inflation and real risk premia, real interest rates and inflation expectations for each EA country; ii) a timely update of the estimated term premium and its components for EA government bonds; iii) measures for the sensitivity of the term premium and its components to shocks in macro, volatility and global factors; iv) a series of indicators for the exposure of EA government bonds to macro risk, volatility risk, and global risk; v) a timely update of the estimated term structure of real interest rates and inflation expectations; vi) a practical tool to analyse the co-movement of term premia, calculate their degree of connectedness and build the implied network structure.
These results are contained both in the articles produced by the research activity and in the website dedicated to the project.
The work plan has been divided into seven work packages (WP) reporting the deliverables and the milestones expected over the lifetime of the project.
WP1 Management
The administrative and financial management and the monitoring activities lasted from the first day until the end of the project. The project has been divided into four equally-spaced reporting periods and four monitoring reports have been delivered to the Supervisor.
WP2 Training
Before starting the activities a realistic Career Development Plan has been drafted with the Supervisor, in order to clearly set the objectives to be achieved through the project.
WP3 Database
Construction of the database for government bonds and macroeconomic data. Data have been collected from different data providers, such as Bloomberg, Eurostat, OECD iLibrary, Global Insights, Central Banks and National Institutes of Statistics.
WP4 Generation of input data
Estimation of yield curves and synthetic macro factors. The delivery includes SAS codes for yield curve estimation and dynamic factor analysis and, for the output, a database in XLS format and a database in SAS format.
WP5 Design of the multi-country macro term structure model
Development of a stochastic volatility multi-country macro term structure model. The codes for the empirical estimation of the model have been implemented in a SAS format. The delivery is composed by a technical report, including a review of the related literature and a description of the structure of the model, and by SAS codes.
WP6 Estimation of the multi-country macro term structure model
The model has been estimated for ten eurozone countries (Germany, France, Netherlands, Belgium, Finland, Austria, Italy, Spain, Portugal and Ireland) and an output report has been generated. The delivery includes a technical report describing the model estimates.
WP7 Dissemination and communication
The dissemination activity includes: i) 3 articles at an advanced stage; ii) 3 working papers presented in international conferences; iii) use of Social Science Research Network (SSRN) to disseminate research results in form of working papers; iv) presentations at conferences and seminars.
The communication activity includes: i) participation as speaker in the MSC Info-Day; ii) participation in various meetings gathering MSCA fellows; iii) teaching activity at master level; iv) communication of results of the research project to both the academic community, the policymakers and the general public via Linkedin and other professional channels; v) Data Management Plan; vi) project website (
The impact of the project on my career has been very positive. During the two-year activity, I acquired new knowledge in timely and relevant topics of finance and econometrics, thereby improving my ability to publish in international journals of high level and present papers at prestigious conferences and universities.
The project has also allowed me to improve my expertise in the management of research projects. I am currently involved in the preparation of two different draft proposals for Horizon Europe collaborative projects with Ca’ Foscari as Partner Institution.
I have also developed cooperative networks and working relationships with peers within the Department of Economics and the wider research community. The results of the project have been particularly appreciated by policymakers at the BIS, the IMF, the ECB, the Bank of England, the Bundesbank, the Nederlandsche Bank, and the Bank of Italy.
As regards the impact of the project in the medium term, my career will be supported by Ca’ Foscari in two ways: i) through the Marie Curie +1” programme, which offers researchers who have received a MSCA fellowship with Ca’ Foscari as host institution an additional year on their contract to allow them to consolidate their results and plan new developments; ii) holding a competition for a permanent position of professor as soon as I have regained the national scientific qualification (“Abilitazione Scientifica Nazionale”). In this regard, the project would have fully achieved the main objective of the Career Restart Panel, i.e. resuming my research career by regaining a permanent academic position in a European university that is recognised as a renowned centre of excellence.
The research project has produced different quantitative tools for the management of interest rate risk and inflation risk in global long-term bond portfolios and could be exploited commercially, with potential customers given by insurance companies, pension funds, investment banks, and hedge funds. The utilization of the results for commercial purposes will be evaluated with the Supervisor. Ca’ Foscari encourages the direct exploitation and fostering of research results and has established the knowledge transfer office PInK (Promoting Innovation and Knowledge).
Opening page EUTERPE website