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Estimating risk premia in money market rates

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Author Info
Rasmus Pilegaard () (European Central Bank, Postfach 160319, 60311 Frankfurt am Main, Germany.)
Alain Durre () (National Bank of Belgium - Research Department 3, Bld de Berlaimont, B - 1000 Brussels, Belgium.)
Snorre Evjen () (Central Bank of Norway - Research Department, Box 1179 Sentrum, N-0107 Oslo, Norway.)

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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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Paper provided by European Central Bank in its series Working Paper Series with number 221.

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Length: 65 pages
Date of creation: Apr 2003
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Handle: RePEc:ecb:ecbwps:20030221

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Keywords: Term structure of interest rates; expectations hypothesis; cointegrated VAR models.;

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References listed on IDEAS
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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Full references

Cited by:
(explanations, 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.)

  1. 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. [Downloadable!]
  2. Gabriel Pérez Quirós & Jorge Sicilia, 2002. "Is the European Central Bank (and the United States Federal Reserve) predictable?," Banco de España Working Papers 0229, Banco de España. [Downloadable!]
    Other versions:
  3. 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. [Downloadable!]
  4. Grahame Johnson, 2003. "Measuring Interest Rate Expectations in Canada," Working Papers 03-26, Bank of Canada. [Downloadable!]
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