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The term structure of commercial paper rates

  • Downing, Chris
  • Oliner, Stephen

This paper tests the expectations hypothesis in the market for commercial paper. Our main dataset, which is new to the literature, consists of daily indexes constructed from the actual market yields for nearly all commercial paper issued by U.S. corporations between January 1998 and August 2003. We show that the term premia built into commercial paper yields rise dramatically at year-end, causing the expectations hypothesis to be rejected. However, once we control for these predictable year-end effects, we find the reverse--that commercial paper yields largely conform with the expectations hypothesis.

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File URL: http://www.sciencedirect.com/science/article/B6VBX-4KDBM8P-1/2/d5cba1745d790e1144f532de1987896c
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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 83 (2007)
Issue (Month): 1 (January)
Pages: 59-86

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Handle: RePEc:eee:jfinec:v:83:y:2007:i:1:p:59-86
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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  1. Angelo Melino, 1986. "The Term Structure of Interest Rates: Evidence and Theory," NBER Working Papers 1828, National Bureau of Economic Research, Inc.
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  10. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May.
  11. Glenn D. Rudebusch, 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Working Papers in Applied Economic Theory 95-02, Federal Reserve Bank of San Francisco.
  12. Shiller, Robert J. & Huston McCulloch, J., 1990. "The term structure of interest rates," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 13, pages 627-722 Elsevier.
  13. Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 2001. "Peso problem explanations for term structure anomalies," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 241-270, October.
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  16. repec:cup:etheor:v:11:y:1995:i:5:p:1131-47 is not listed on IDEAS
  17. Longstaff, Francis A., 2000. "The term structure of very short-term rates: New evidence for the expectations hypothesis," Journal of Financial Economics, Elsevier, vol. 58(3), pages 397-415, December.
  18. Cavanagh, Christopher L. & Elliott, Graham & Stock, James H., 1995. "Inference in Models with Nearly Integrated Regressors," Econometric Theory, Cambridge University Press, vol. 11(05), pages 1131-1147, October.
  19. Geert Bekaert & Robert J. Hodrick & David A. Marshall, 1996. "On Biases in Tests of the Expecations Hypothesis of the Term Structure Of Interest Rates," NBER Technical Working Papers 0191, National Bureau of Economic Research, Inc.
  20. Musto, David K, 1997. " Portfolio Disclosures and Year-End Price Shifts," Journal of Finance, American Finance Association, vol. 52(4), pages 1563-88, September.
  21. Balduzzi, Pierluigi & Bertola, Giuseppe & Foresi, Silverio, 1997. "A model of target changes and the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 223-249, July.
  22. Jennifer E. Roush, 2001. "Evidence uncovered: long-term interest rates, monetary policy, and the expectations theory," International Finance Discussion Papers 712, Board of Governors of the Federal Reserve System (U.S.).
  23. Fama, Eugene F., 1986. "Term premiums and default premiums in money markets," Journal of Financial Economics, Elsevier, vol. 17(1), pages 175-196, September.
  24. 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.
  25. Mark D. Griffiths & Drew B. Winters, 2005. "The Turn of the Year in Money Markets: Tests of the Risk-Shifting Window Dressing and Preferred Habitat Hypotheses," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1337-1364, July.
  26. Timothy Cook & Thomas Hahn, 1990. "Interest rate expectations and the slope of the money market yield curve," Economic Review, Federal Reserve Bank of Richmond, issue Sep, pages 3-26.
  27. Lange, Joe & Sack, Brian & Whitesell, William, 2003. " Anticipations of Monetary Policy in Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 889-909, December.
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