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

Christian Wolff, Ron Jongen () and Willem Verschoor
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Ron Jongen: Erasmus School of Economics, Erasmus University Rotterdam

LSF Research Working Paper Series from Luxembourg School of Finance, University of Luxembourg

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.

Keywords: Interest rate expectations; expectations hypothesis; rationality; survey data; term structure; time-varying term premia. (search for similar items in EconPapers)
JEL-codes: E42 E43 G15 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-mon
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Journal Article: Time-variation in term premia: International survey-based evidence (2011)
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