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The term structure of commercial paper rates

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  • Downing, Chris
  • Oliner, Stephen

Abstract

This paper tests the expectations hypothesis in the market for commercial paper. Our main dataset, which is new to the literature, consists of daily indexes constructed from the actual market yields for nearly all commercial paper issued by U.S. corporations between January 1998 and August 2003. We show that the term premia built into commercial paper yields rise dramatically at year-end, causing the expectations hypothesis to be rejected. However, once we control for these predictable year-end effects, we find the reverse--that commercial paper yields largely conform with the expectations hypothesis.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 83 (2007)
Issue (Month): 1 (January)
Pages: 59-86

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Handle: RePEc:eee:jfinec:v:83:y:2007:i:1:p:59-86

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Web page: http://www.elsevier.com/locate/inca/505576

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References

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  1. Eric T. Swanson, 2004. "Federal Reserve transparency and financial market forecasts of short-term interest rates," Finance and Economics Discussion Series 2004-06, Board of Governors of the Federal Reserve System (U.S.).
  2. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May.
  3. Shiller, Robert J. & Huston McCulloch, J., 1990. "The term structure of interest rates," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 13, pages 627-722 Elsevier.
  4. Geert Bekaert & Robert J. Hodrick & David A. Marshall, 1997. ""Peso problem" explanations for term structure anomalies," Working Paper Series, Issues in Financial Regulation WP-97-07, Federal Reserve Bank of Chicago.
  5. Jennifer E. Roush, 2001. "Evidence uncovered: long-term interest rates, monetary policy, and the expectations theory," International Finance Discussion Papers 712, Board of Governors of the Federal Reserve System (U.S.).
  6. Sharon Kozicki & P.A. Tinsley, 1997. "Shifting endpoints in the term structure of interest rates," Research Working Paper 97-08, Federal Reserve Bank of Kansas City.
  7. Timothy Cook & Thomas Hahn, 1990. "Interest rate expectations and the slope of the money market yield curve," Economic Review, Federal Reserve Bank of Richmond, issue Sep, pages 3-26.
  8. Lange, Joe & Sack, Brian & Whitesell, William, 2003. " Anticipations of Monetary Policy in Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 889-909, December.
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  19. Fama, Eugene F., 1986. "Term premiums and default premiums in money markets," Journal of Financial Economics, Elsevier, vol. 17(1), pages 175-196, September.
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  26. Simon, David P, 1990. " Expectations and the Treasury Bill-Federal Funds Rate Spread over Recent Monetary Policy Regimes," Journal of Finance, American Finance Association, vol. 45(2), pages 467-77, June.
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Citations

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Cited by:
  1. Covitz, Daniel & Liang, Nellie & Suarez, Gustavo, 2009. "The anatomy of a financial crisis: the evolution of panic-driven runs in the asset-backed commercial paper market," Proceedings, Federal Reserve Bank of San Francisco, issue Jan, pages 1-36.
  2. Daniel M. Covitz & Nellie Liang & Gustavo A. Suarez, 2009. "The evolution of a financial crisis: panic in the asset-backed commercial paper market," Finance and Economics Discussion Series 2009-36, Board of Governors of the Federal Reserve System (U.S.).
  3. Gurkaynak, Refet S. & Sack, Brian T. & Swanson, Eric P., 2007. "Market-Based Measures of Monetary Policy Expectations," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 201-212, April.
  4. Griffiths, Mark D. & Kotomin, Vladimir & Winters, Drew B., 2009. "Year-end and quarter-end effects in the term structure of sterling repo and Eurepo rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(5), pages 803-817, December.
  5. Brown, Craig R. & Cyree, Ken B. & Griffiths, Mark D. & Winters, Drew B., 2008. "Further analysis of the expectations hypothesis using very short-term rates," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 600-613, April.
  6. Kopchak, Seth J., 2013. "The realized forward term premium in the repo market," Journal of Financial Markets, Elsevier, vol. 16(2), pages 253-278.
  7. Smant, David / D.J.C., 2010. "Direct tests of the expectations theory of the term structure: Survey expectations, the term premium and coefficient biases," MPRA Paper 19815, University Library of Munich, Germany.
  8. Kotomin, Vladimir, 2011. "A test of the expectations hypothesis in very short-term international rates in the presence of preferred habitat for liquidity," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(1), pages 49-55, February.

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