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On the Relationship Between the Very Short Forward and the Spot Interest Rate

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Author Info
Iichiro Uesugi
Guy M. Yamashiro
Abstract

In this paper we revisit the relationship between the forward interest rate and the spot interest rate at the shortest maturities. We introduce a new set of very short forward and spot interest rates that have not been fully utilized in the literature: the "tomorrow next" rate and the "spot next" rate, both of which have the same maturity as the overnight rate. Using these interest rates we demonstrate an asymmetric predictability of the forward interest rate. This asymmetry, which we find to be robust across different money markets, depends on whether the forward rate is greater or less than the current spot rate. Money market institutions, such as a penalty for end of day overdrafts, and the inability of securities firms to procure funds in certain markets may explain the asymmetry.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 03013.

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Length: 37 pages
Date of creation: May 2003
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Handle: RePEc:eti:dpaper:03013

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  7. repec:fip:fedreq:y:1990:i:sep:p:3-26:n:v.76no.5 is not listed on IDEAS
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  9. Froot, Kenneth A, 1989. " New Hope for the Expectations Hypothesis of the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 44(2), pages 283-305, June. [Downloadable!] (restricted)
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  15. Hardouvelis, Gikas A., 1994. "The term structure spread and future changes in long and short rates in the G7 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 255-283, April. [Downloadable!] (restricted)
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  17. Hardouvelis, Gikas A, 1988. " The Predictive Power of the Term Structure during Recent Monetary Regimes," Journal of Finance, American Finance Association, vol. 43(2), pages 339-56, June. [Downloadable!] (restricted)
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  18. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June. [Downloadable!] (restricted)
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  19. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, vol. 77(4), pages 680-92, September. [Downloadable!] (restricted)
  20. Roberds, William & Runkle, David & Whiteman, Charles H, 1996. "A Daily View of Yield Spreads and Short-Term Interest Rate Movements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 34-53, February. [Downloadable!] (restricted)
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  22. N. Gregory Mankiw & Jeffrey A. Miron, 1986. "The Changing Behavior of the Term Structure of Interest Rates," NBER Working Papers 1669, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  23. Bennett T. McCallum, 1994. "Monetary Policy and the Term Structure of Interest Rates," NBER Working Papers 4938, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  24. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December. [Downloadable!] (restricted)
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  27. Simon, David P., 1989. "Expectations and Risk in the Treasury Bill Market: An Instrumental Variables Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(03), pages 357-365, September. [Downloadable!]
  28. Kenneth A. Froot, 1990. "New Hope for the Expectations Hypothesis of the Term Structure of Interest Rates," NBER Working Papers 2363, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  29. Narasimhan Jegadeesh & George G. Pennacchi, 1996. "The behavior of interest rates implied by the term structure of Eurodollar future," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 426-451.
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