Abstract
This paper demonstrates that a time-varying risk premium can account for the rejection of the expectations theory of the term structure of interest rates. Rather than model risk directly in terms of observables, we instead exploit an implication of the capital asset pricing model concerning how risk premia for a given maturity structure will vary through time in a related manner across different types of assets. We use a panel data set of returns on Eurocurrency deposits and employ cross-section/time-series methods to account for related movements in risk premia across assets which differ by currency denomination.
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