Advanced Search
MyIDEAS: Login to save this article or follow this journal

Measuring interest rate expectations from market yields: topical issues

Contents:

Author Info

  • Klára Pintér

    ()
    (Magyar Nemzeti Bank (central bank of Hungary))

  • György Pulai

    ()
    (Magyar Nemzeti Bank (central bank of Hungary))

Abstract

Learning market participants’ policy rate expectations is a major issue for central banks. The underlying reason for this is that the interest rate expectations of market participants may themselves contain information on market participants’ perceptions of the economic prospects, which decision-makers might want to incorporate into their own assessment of the outlook. Market participants’ expectations, however, cannot be observed directly and are difficult to quantify. Of the two most common approaches, we will discuss in detail the one where we infer market expectations from the prices of the financial instruments which are closely related to expectations. In properly functioning, liquid markets we can infer market participants’ expectations of future interest rates from the prices of and returns on government securities and inter-bank transactions. Before the onset of the financial crisis, BUBOR (Budapest Inter-bank Offered Rate) reflected market participants’ expectations of the interest rate relatively reliably, but since the deepening of the crisis, this has changed for a number of reasons, which we will also seek to pinpoint. The fact that BUBOR no longer reflects real market expectations, i.e. it distorts them, is all the more important as this measure serves as a benchmark rate for other financial products, among other things, for corporate loans. The loss of the information content of BUBOR means that the yield curve derived from returns on inter-bank market instruments provides a more accurate measure of market expectations if we exclude data on BUBOR fixings. Nevertheless, forward rate agreements (FRAs) settled on BUBOR remain suitable for the quantification of market participants’ expectations. However, in interpreting these, it is important that, in addition to credit and liquidity risk premia, the bias caused by BUBOR should also be taken into consideration.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://english.mnb.hu/Root/Dokumentumtar/ENMNB/Kiadvanyok/mnben_mnbszemle/mnben_mnb_bulletin_junius_2009/pinter_pulai_angol_0908.pdf
Download Restriction: no

Bibliographic Info

Article provided by Magyar Nemzeti Bank (the central bank of Hungary) in its journal MNB Bulletin.

Volume (Year): 4 (2009)
Issue (Month): 2 (July)
Pages: 34-42

as in new window
Handle: RePEc:mnb:bullet:v:4:y:2009:i:2:p:34-42

Contact details of provider:
Web page: http://www.mnb.hu/
More information through EDIRC

Related research

Keywords: interest rates; expectations; financial markets; monetary policy.;

Find related papers by JEL classification:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:mnb:bullet:v:4:y:2009:i:2:p:34-42. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maja Bajcsy).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.