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Testing the expectations hypothesis with survey forecasts: The impacts of consumer sentiment and the zero lower bound in an I(2) CVAR

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  • Stillwagon, Josh R.

Abstract

Monthly interest rate forecasts from nearly 50 major financial institutions are used to examine the expectations hypothesis at the short end of the term structure for the Canadian T-bill market and Libor markets in the US, UK, and Switzerland. Using CVARs, the term premium is found to move inversely with consumer sentiment in all four samples at the 1% level. Extension to the polynomial CVAR also suggests that a fall in the interest rate raises the premium, at least temporarily. This is interpreted as arising from the decreasing upside potential for bond price movements related to the zero lower bound.

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  • Stillwagon, Josh R., 2015. "Testing the expectations hypothesis with survey forecasts: The impacts of consumer sentiment and the zero lower bound in an I(2) CVAR," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 35(C), pages 85-101.
  • Handle: RePEc:eee:intfin:v:35:y:2015:i:c:p:85-101
    DOI: 10.1016/j.intfin.2015.01.004
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    Cited by:

    1. Kim, Joseph H.T. & Li, Johnny S.H., 2017. "Risk-neutral valuation of the non-recourse protection in reverse mortgages: A case study for Korea," Emerging Markets Review, Elsevier, vol. 30(C), pages 133-154.
    2. repec:eee:jimfin:v:83:y:2018:i:c:p:93-105 is not listed on IDEAS
    3. repec:eee:intfin:v:48:y:2017:i:c:p:192-205 is not listed on IDEAS

    More about this item

    Keywords

    Expectations hypothesis; Survey data; Time-varying risk premium; Consumer sentiment; Cointegrated VAR; Zero lower bound;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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