The Forward Premium of Euro Interest Rates
We show that euro forward rates are biased predictors of future interest rates. A small part of this bias arises from unexpected changes in interest rates, while a larger part is explained by the forward premia, which are generally not time-varying. We estimate the the 3-month forward premia for different horizons using forecasts of yields obtained with the Diebold and Li (2006) approach, extended by the inclusion of macroeconomic variables. Confidence intervals for the estimates are computed using a novel bootstrap approach. When using German data for the period before 1999, we detect a break in the dynamic correlation between yield factors, implying that estimates of the euro forward premium using pre-euro data are biased. Although the forward premia of horizons up to 36 months are on average positive, their confidence intervals indicate that they are significantly equal to zero in some periods of time. They are also positively correlated with the ECB policy rate and with a measure of the market perception that future interest rates could be higher than expected.
(This abstract was borrowed from another version of this item.)
Volume (Year): (2006)
Issue (Month): ()
|Contact details of provider:|| Postal: R. do Ouro, 27, 1100 LISBOA|
Phone: 21 321 32 00
Fax: 21 346 48 43
Web page: http://www.bportugal.pt
More information through EDIRC
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.:
- Peter Hordahl & Oreste Tristani & David Vestin, 2003. "A joint econometric model of macroeconomic and term structure," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
When requesting a correction, please mention this item's handle: RePEc:ptu:bdpart:b200613. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (DEE-NTDD)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.