IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Testing the Expectations Hypothesis with Survey Forecasts: The Impacts of Consumer Sentiment and the Zero Lower Bound in an I(2) CVAR

Listed author(s):
  • Josh Stillwagon

    ()

    (Department of Economics, Trinity College)

Monthly interest rate forecasts from nearly 50 major financial institutions are used to examine the expectations hypothesis at the short end of the term structure for the Canadian T-bill market and Libor markets in the US, UK, and Switzerland. Using CVARs, the term premium is found to move inversely with consumer sentiment in all four samples at the 1% level. Extension to the polynomial CVAR also suggests that a fall in the interest rate raises the premium, at least temporarily. This is interpreted as arising from the decreasing upside potential for bond price movements related to the zero lower bound.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://internet2.trincoll.edu/repec/WorkingPapers2014/WP14-01.pdf
File Function: First version, 2014
Download Restriction: no

Paper provided by Trinity College, Department of Economics in its series Working Papers with number 1401.

as
in new window

Length: 35 pages
Date of creation: Jan 2014
Handle: RePEc:tri:wpaper:1401
Contact details of provider: Postal:
300 Summit Street, Hartford, CT 06106-3100

Phone: (860) 297 - 2485
Web page: http://www.trincoll.edu/Academics/MajorsAndMinors/Economics/Pages/default.aspx

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Søren Johansen & Morten Ørregaard Nielsen, 2012. "Likelihood Inference for a Fractionally Cointegrated Vector Autoregressive Model," Econometrica, Econometric Society, vol. 80(6), pages 2667-2732, November.
  2. Ricardo J. Caballero & Arvind Krishnamurthy, 2007. "Collective Risk Management in a Flight to Quality Episode," NBER Working Papers 12896, National Bureau of Economic Research, Inc.
  3. Bacchetta, Philippe & Mertens, Elmar & van Wincoop, Eric, 2006. "Predictability in Financial Markets: What Do Survey Expectations Tell Us?," CEPR Discussion Papers 5770, C.E.P.R. Discussion Papers.
  4. Froot, Kenneth A, 1989. " New Hope for the Expectations Hypothesis of the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 44(2), pages 283-305, June.
  5. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," NBER Working Papers 17555, National Bureau of Economic Research, Inc.
  6. Larry G. Epstein & Martin Schneider, 2008. "Ambiguity, Information Quality, and Asset Pricing," Journal of Finance, American Finance Association, vol. 63(1), pages 197-228, 02.
  7. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128 Elsevier.
  8. Nielsen, Heino Bohn & Rahbek, Anders, 2007. "The Likelihood Ratio Test For Cointegration Ranks In The I(2) Model," Econometric Theory, Cambridge University Press, vol. 23(04), pages 615-637, August.
  9. MacDonald, Ronald, 2000. " Expectations Formation and Risk in Three Financial Markets: Surveying What the Surveys Say," Journal of Economic Surveys, Wiley Blackwell, vol. 14(1), pages 69-100, February.
  10. Granger, C W J & Lee, T H, 1989. "Investigation of Production, Sales and Inventory Relationships Using Multicointegration and Non-symmetric Error Correction Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(S), pages 145-159, Supplemen.
  11. Lucio Sarno & Daniel L. Thornton & Giorgio Valente, 2005. "The empirical failure of the expectations hypothesis of the term structure of bond yields," Working Papers 2003-021, Federal Reserve Bank of St. Louis.
  12. John H. Cochrane & Monika Piazzesi, 2002. "Bond Risk Premia," NBER Working Papers 9178, National Bureau of Economic Research, Inc.
  13. Ansgar Belke & Joscha Beckmann & Michael Kühl, 2009. "Global Integration of Central and Eastern European Financial Markets: The Role of Economic Sentiments," Discussion Papers of DIW Berlin 952, DIW Berlin, German Institute for Economic Research.
  14. Friedman, Benjamin M., 1980. "Survey evidence on the `rationality' of interest rate expectations," Journal of Monetary Economics, Elsevier, vol. 6(4), pages 453-465, October.
  15. John Y. Campbell & John H. Cochrane, 1995. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," NBER Working Papers 4995, National Bureau of Economic Research, Inc.
  16. Kenneth A. Froot and Jeffrey A. Frankel., 1988. "Forward Discount Bias: Is It an Exchange Risk Premium?," Economics Working Papers 8874, University of California at Berkeley.
  17. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  18. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
  19. Sydney C. Ludvigson & Serena Ng, 2009. "Macro Factors in Bond Risk Premia," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5027-5067, December.
  20. 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.
  21. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  22. John Y. Campbell & Robert J. Shiller, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Oxford University Press, vol. 58(3), pages 495-514.
  23. Daniel L. Thornton, 2005. "Predictions of short-term rates and the expectations hypothesis of the term structure of interest rates," Working Papers 2004-010, Federal Reserve Bank of St. Louis.
  24. Joscha Beckmann & Ansgar Belke & Michael Kühl, 2012. "The cross-country importance of global sentiments—evidence for smaller EU countries," International Economics and Economic Policy, Springer, vol. 9(3), pages 245-264, September.
  25. Kathryn Dominguez, 1986. "Are foreign exchange forecasts rational? New evidence from survey data," International Finance Discussion Papers 281, Board of Governors of the Federal Reserve System (U.S.).
  26. Clara Jørgensen & Hans Christian Kongsted & Anders Rahbek, 1996. "Trend-Stationarity in the I(2) Cointegration Model," Discussion Papers 96-12, University of Copenhagen. Department of Economics.
  27. Pierre Collin-Dufresne, 2001. "On the Term Structure of Default Premia in the Swap and LIBOR Markets," Journal of Finance, American Finance Association, vol. 56(3), pages 1095-1115, 06.
  28. MacDonald, Ronald & Macmillan, Peter, 1994. "On the Expectations View of the Term Structure, Term Premia and Survey-Based Expectations," Economic Journal, Royal Economic Society, vol. 104(426), pages 1070-1086, September.
  29. Niels Haldrup, 1998. "An Econometric Analysis of I(2) Variables," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 595-650, December.
  30. Matthew Rabin., 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Economics Working Papers E00-279, University of California at Berkeley.
  31. Cavaglia, Stefano M F G & Verschoor, Willem F C & Wolff, Christian C P, 1994. "On the Biasedness of Forward Foreign Exchange Rates: Irrationality or Risk Premia?," The Journal of Business, University of Chicago Press, vol. 67(3), pages 321-343, July.
  32. Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, number 9780199285679.
  33. Henrik Hansen & Søren Johansen, 1999. "Some tests for parameter constancy in cointegrated VAR-models," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 306-333.
  34. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," Review of Economic Studies, Oxford University Press, vol. 25(2), pages 65-86.
  35. Jonathan H. Wright, 2011. "Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset," American Economic Review, American Economic Association, vol. 101(4), pages 1514-1534, June.
  36. Paruolo, Paolo & Rahbek, Anders, 1999. "Weak exogeneity in I(2) VAR systems," Journal of Econometrics, Elsevier, vol. 93(2), pages 281-308, December.
  37. Benjamin M. Friedman, 1980. "Survey Evidence on The Rationality of Interest Rate Expectations," NBER Working Papers 0261, National Bureau of Economic Research, Inc.
  38. Michael D. Bauer & Glenn D. Rudebusch & Jing Cynthia Wu, 2014. "Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset: Comment," American Economic Review, American Economic Association, vol. 104(1), pages 323-337, January.
  39. Johansen, Søren & Juselius, Katarina & Frydman, Roman & Goldberg, Michael, 2010. "Testing hypotheses in an I(2) model with piecewise linear trends. An analysis of the persistent long swings in the Dmk/$ rate," Journal of Econometrics, Elsevier, vol. 158(1), pages 117-129, September.
  40. repec:bin:bpeajo:v:43:y:2011:i:2011-02:p:215-287 is not listed on IDEAS
  41. 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.
  42. Gourinchas, Pierre-Olivier & Tornell, Aaron, 2004. "Exchange rate puzzles and distorted beliefs," Journal of International Economics, Elsevier, vol. 64(2), pages 303-333, December.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:tri:wpaper:1401. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joshua Stillwagon)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.