In some models, these factors can be explicitly tied to observable economic variables, such as inflation; in other models, the factors represent statistical summaries of the data and have no explicit economic interpretations.
These factors, in turn, can be used to estimate term premiums at each point in time, although one should clearly acknowledge that the results can be sensitive to various statistical and modeling assumptions. According to several of the most popular models, a substantial portion of the decline in distant-horizon forward rates over recent quarters can be attributed to a drop in term premiums.