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Interbank interest rates and the risk premium

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  • Henri Pagès

    (Fondation Banque de France pour la Recherche)

Abstract

The paper presents a one-factor affine model of the term structure of Libor rates with autocorrelated measurement errors. It can be viewed as a central tendency model, with the theoretical arbitrage-free rates serving as stochastic means to which the observed rates revert. Two estimation techniques are compared, one based on a no-measurement-error assumption, the other on Kalman filtering. The estimates are then used in standard yield spread regressions with a view to accounting for the departure of future short rates from what the expectations hypothesis would predict.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 81.

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Length: 44 pages
Date of creation: Nov 1999
Date of revision:
Handle: RePEc:bis:biswps:81

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  1. Michael J. Fleming & Eli M Remolona, 1999. "The term structure of announcement effects," BIS Working Papers 71, Bank for International Settlements.
  2. Farshid Jamshidian, 1997. "LIBOR and swap market models and measures (*)," Finance and Stochastics, Springer, vol. 1(4), pages 293-330.
  3. Manuel Moreno & Juan I. Peña, 1996. "On the term structure of Interbank interest rates: Jump-diffusion processes and option pricing," Economics Working Papers 191, Department of Economics and Business, Universitat Pompeu Fabra.
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Cited by:
  1. Ippei Fujiwara & Yuki Teranishi, 2008. "Real Exchange Rate Dynamics under Staggered Loan Contracts," IMES Discussion Paper Series 08-E-11, Institute for Monetary and Economic Studies, Bank of Japan.

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