The Reinvestment Risk Premium in the Valuation of British and Russian Government Coupon Bonds
This study examines the nature and dynamics of the reinvestment risk premium in the UK and Russian government bond market. We adopt the unrestricted and restricted ECM approach of Pesaran et al. (2001) and Engle and Granger (1987). We find that in the both markets the reinvestment risk premium is generated with an autoregressive component. The reinvestment risk premiums in the UK and RF are nearly equally sensitive to the risk factor. They are also sensitive to the level of budget deficit. The difference is that in the UK the investment community assesses the 5-year reinvestment risk premium based on two factors with forecast capacity – the level of budget deficit and the inflation variance. In the RF the investment community relies only on one factor with forecast capacity for a 5-year period – deviation in interest rates. The significance of the currency risk factor is confirmed only for the RF.