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Estimating risk premia in money market rates

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  • Pilegaard, Rasmus
  • Durré, Alain
  • Evjen, Snorre

Abstract

This paper empirically tests the expectations hypothesis on both daily EONIA swap rates and monthly EURIBOR rates extended backwards with German LIBOR rates. In addition, we quantify the size of the risk premia in the money market at maturities of one, three, six and nine months. Using implied forward and spot rates in a cointegrated VAR model, we find that the data support the expectations hypothesis in the euro area and in Germany prior to 1999. We find that risk premia are relatively limited at the shorter maturities but more significant at maturities of six and nine months. Furthermore, the results on LIBOR/EURIBOR rates tentatively indicate a downward shift in the structure of the risk premia after the introduction of the euro. JEL Classification: E43, C32

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0221.

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Date of creation: Apr 2003
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Handle: RePEc:ecb:ecbwps:20030221

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Citations

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Cited by:
  1. Grahame Johnson, 2003. "Measuring Interest Rate Expectations in Canada," Working Papers 03-26, Bank of Canada.
  2. Joyce, Michael & Relleen, Jonathan & Sorensen, Steffen, 2008. "Measuring monetary policy expectations from financial market instruments," Bank of England working papers 356, Bank of England.
  3. Pérez Quirós, Gabriel & Sicilia, Jorge, 2002. "Is the European Central Bank (and the United States Federal Reserve) predictable?," Working Paper Series 0192, European Central Bank.
  4. Viktors Ajevskis & Kristine Vitola, 2006. "A Factor Model of the Term Structure of Interest Rates and Risk Premium Estimation for Latvia's Money Market," Working Papers 2006/01, Latvijas Banka.
  5. Galvao, Ana Beatriz & Costa, Sonia, 2013. "Does the euro area forward rate provide accurate forecasts of the short rate?," International Journal of Forecasting, Elsevier, vol. 29(1), pages 131-141.
  6. Denise Côté & Christopher Graham, 2004. "Convergence of Government Bond Yields in the Euro Zone: The Role of Policy Harmonization," Working Papers 04-23, Bank of Canada.

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