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Testing the Liquidity Preference Hypothesis using Survey Forecasts

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Listed:
  • Jose Renato Haas Ornelas
  • Antonio Francisco de Almeida Silva Jr

Abstract

We evaluate the Liquidity Preference Hypothesis (LPH) for the term structure of interest rates in a different way. Instead of using bond returns as traditional approaches, we use interest rate surveys with market expectations in order to evaluate LPH. This approach allows us to disentangle the effect of the changes in interest rate expectations from the liquidity premium. We found empirical support for the LPH with Brazilian data using both traditional and survey methods. However, the evaluation with interest rate surveys gives a higher statistical confidence level than the traditional approach when we perform tests for term premium monotonicity.

Suggested Citation

  • Jose Renato Haas Ornelas & Antonio Francisco de Almeida Silva Jr, 2014. "Testing the Liquidity Preference Hypothesis using Survey Forecasts," Working Papers Series 353, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:353
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G1 - Financial Economics - - General Financial Markets

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