Simple Estimates for the US Term Premium

Abstract

In this paper, we propose a simple procedure to estimate term premium for US Treasury bond yields. The estimation procedure is based on the Dynamic-Nelson-Siegel model which has only one parameter under the risk-neutral measure, which we calibrate at 94% based on previous literature but also in empirical exercises using a monthly sample from 1980 to 2024. The calibration allows us to obtain latent factors by inverting a 3x3 matrix, and obtaining the term premium with the parameters of a VAR model estimated for the same sample. Results for the 5 and 10-year bond yields are broadly in line with figures published by the Federal Reserve of New York.