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Time-Variation in Term Permia: International Survey-Based Evidence

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  • Christian Wolff

    () (Luxembourg School of Finance, University of Luxembourg)

  • Ron Jongen

    () (Erasmus School of Economics, Erasmus University Rotterdam)

  • Willem F.C. Verschoor

    ()

Abstract

Using a large, previously unexplored international dataset of market expectations that covers a broad range of deposits, this paper presents a wealth of empirical evidence on the behavior of the term structure of interest rates in an international perspective. We find that our survey forecasts are of quite good quality, outperforming a relevant naive benchmark in most cases. We also find considerable international evidence in favor of rejecting the ‘pure’ version of the expectations hypothesis. We also find some evidence that the behavior of market participants, when making predictions about the future level of interest rates, is not entirely in line with rational behavior. There is strong evidence of time-variation in term premia. Furthermore, while this variation in term premia can be captured adequately by low-order members of the ARMA class models, there is clear evidence that conditional heteroskedasticity in the movement of term premia plays an important role in explaining the time-variation for a number of countries.

Suggested Citation

  • Christian Wolff & Ron Jongen & Willem F.C. Verschoor, 2009. "Time-Variation in Term Permia: International Survey-Based Evidence," LSF Research Working Paper Series 09-02, Luxembourg School of Finance, University of Luxembourg.
  • Handle: RePEc:crf:wpaper:09-02
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    Cited by:

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    2. Inaba, Kei-Ichiro, 2020. "Japan’s impactful augmentation of quantitative easing sovereign-bond purchases," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    3. Chen, Cathy Yi-Hsuan & Kuo, I-Doun & Chiang, Thomas C., 2014. "What explains deviations in the unbiased expectations hypothesis? Market irrationality vs. the peso problem," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 30(C), pages 172-190.
    4. Galvao, Ana Beatriz & Costa, Sonia, 2013. "Does the euro area forward rate provide accurate forecasts of the short rate?," International Journal of Forecasting, Elsevier, vol. 29(1), pages 131-141.
    5. Casper De Vries & Xuedong Wang & Casper G, de Vries, 2015. "Inflation, Endogenous Market Segmentation and the Term Structure of Interest Rates," CESifo Working Paper Series 5421, CESifo.
    6. Ornelas, Jose Renato Haas & Silva Jr., Antonio Francisco de Almeida, 2015. "Testing the liquidity preference hypothesis using survey forecasts," Emerging Markets Review, Elsevier, vol. 23(C), pages 173-185.
    7. Chen, Qianying, 2011. "Exchange rate dynamics, expectations, and monetary policy," Discussion Paper Series 1: Economic Studies 2011,18, Deutsche Bundesbank.
    8. I Doun Kuo, 2017. "Irrationality and Term Structure Anomaly," Proceedings of Economics and Finance Conferences 4507033, International Institute of Social and Economic Sciences.
    9. Jitmaneeroj, Boonlert & Wood, Andrew, 2013. "The expectations hypothesis: New hope or illusory support?," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 1084-1092.

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    More about this item

    Keywords

    Interest rate expectations; expectations hypothesis; rationality; survey data; term structure; time-varying term premia.;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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