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The Forward Premium in Short-Term Rates

Author

Listed:
  • Ranaldo, Angelo
  • Rupprecht, Matthias

Abstract

This paper provides the first systematic study of the temporal and cross-sectional variation in the risk premium of the expectations hypothesis (EH) at very short end of the term structure. Using a unique and comprehensive dataset of European repurchase (repo) rates, we explain the sources and time variation affecting the risk premium. Our results show that the EH cannot be rejected when loans are secured by safe collateral and that unconventional monetary policy can substantially reduce risk premiums. By contrast, the EH is violated when interest rates are affected by funding risk and collateral risk.

Suggested Citation

  • Ranaldo, Angelo & Rupprecht, Matthias, 2016. "The Forward Premium in Short-Term Rates," Working Papers on Finance 1619, University of St. Gallen, School of Finance, revised Sep 2019.
  • Handle: RePEc:usg:sfwpfi:2016:19
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    File URL: http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1619.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Expectations hypothesis; repo; forward premium; interest rates;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • 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
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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