Does the Expectation Hypothesis Hold at the Shortest End of the Term Structure?
AbstractThis paper examines the predictability smile at the shortest end of the term structure. The existence of a predictability smile has been well documented: spreads between long rates and short rates are able to forecast subsequent movements in interest rates well, provided the horizon is three months or less or two years or more. The predictive power of the spread at the shortest maturities, however, has not been adequately investigated. This is a potential shortcoming of the existing literature as a projection of the predictability smile to the shorter maturities is not a guarantee that the expectations hypothesis holds. In Japan, a positive spread between the forward and the spot rates has insufficient predictive power for the future spot rate innovations, while a negative spread has near-perfect predictive ability. Further, we provide evidence that this result is not unique to Japan, as we find this "asymmetric predictability" to be a feature of the very short-term money markets of the U.S., U.K. and Italy.
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Bibliographic InfoArticle provided by Hitotsubashi University in its journal Hitotsubashi Journal of Economics.
Volume (Year): 50 (2009)
Issue (Month): 1 (June)
Term Structure; Predictability; Money Market;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- John Y. Campbell & Robert J. Shiller, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," NBER Working Papers 3153, National Bureau of Economic Research, Inc.
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