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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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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_386.pdf
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    References listed on IDEAS

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