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Overnight Index Swaps and Monetary Policy Expectations in the US

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  • KısacıkoÄŸlu, Burçin

Abstract

Extracting monetary policy expectations from financial market prices is a topic of interest for policymakers and researchers alike. Overnight index swaps provide a useful measure of monetary policy expectations since they are tied to expected short rates determined by monetary policy. This paper examines the usefulness of OIS rates as measures of policy expectations in the US. After formally testing for unspanned macro risks, we estimate a shadow rate term structure model with hidden macro risks. The decomposition of OIS rates into expectations and risk premia shows that risk premia are negligible in the OIS rates with maturities up to 1 year, but sizable in longer maturities. Running a horse race between model-implied expectations, fed funds, and Eurodollar futures shows that model-implied expectations forecast fed funds rates better than other measures. We argue that expected short rates have increased post-COVID because of higher long-term inflation expectations. We show that real and nominal risks increase OIS risk premiums.

Suggested Citation

  • KısacıkoÄŸlu, Burçin, 2024. "Overnight Index Swaps and Monetary Policy Expectations in the US," CEPR Discussion Papers 19143, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19143
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    File URL: https://cepr.org/publications/DP19143
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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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