Risk premium in the Spanish Market: an empirical study

Abstract

Several papers in the financial literature propose using fuzzy numbers (FNs) to model interest rate uncertainty and to adjust the temporal structure of interest rate (TSIR). In this paper we propose a methodology to test the pure expectations theory in an uncertain environment. Prices and internal rate of returns (IRRs) observed in the government debt market shall be considered fuzzy numbers. The fuzzy test, contrary to the classical approach, leads not yo the binary decision: to reject or to accept a given null hypothesis, but to a fuzzy decision showing a grade of acceptability of the null and the alternative hypotheses, respectively. The study concludes with and application to the Spanish public debt market for the period 2005-2007, which also allows results to be compared from both fuzzy and crisp environments.