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The Information Contained in Forward Rates Movements in Chile

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  • Mauricio Larraín
  • Fernando Parro

Abstract

The purpose of this paper is to examine the information contained in the term structure of inflation-linked interest rates in Chile with respect to expected future interest rates. Using the present discounted value methodology developed by Campbell and Ammer (1993), we decompose excess returns on inflation-linked bonds of maturities from two to five years during the period 1999-2006 into news about future interest news and term premiums. According to the results, a large fraction of the variance of the unexpected returns (between 43% and 67%) can be attributed to term premiums, and therefore we should be careful in attributing movements in the forward curve exclusively to movements in the expected path of future interest rates.

Suggested Citation

  • Mauricio Larraín & Fernando Parro, 2006. "The Information Contained in Forward Rates Movements in Chile," Working Papers Central Bank of Chile 386, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:386
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    References listed on IDEAS

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    1. Ben S. Bernanke, 2006. "Reflections on the yield curve and monetary policy," Speech 175, Board of Governors of the Federal Reserve System (U.S.).
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    4. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
    5. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-1088, October.
    6. 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.
    7. Wachter, Jessica A., 2006. "A consumption-based model of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 79(2), pages 365-399, February.
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    9. Gerlach, Stefan & Smets, Frank, 1997. "The term structure of Euro-rates: some evidence in support of the expectations hypothesis," Journal of International Money and Finance, Elsevier, vol. 16(2), pages 305-321, April.
    10. Dominguez, Emilio & Novales, Alfonso, 2000. "Testing the expectations hypothesis in Eurodeposits," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 713-736, October.
    11. repec:fip:fedgsq:y:2006:i:mar20 is not listed on IDEAS
    12. David G. Barr & Bahram Pesaran, 2000. "An Assessment Of The Relative Importance Of Real Interest Rates, Inflation, And Term Premiums In Determining The Prices Of Real And Nominal U.K. Bonds," The Review of Economics and Statistics, MIT Press, vol. 79(3), pages 362-366, August.
    13. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, vol. 77(4), pages 680-692, September.
    14. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December.
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