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Measuring Interest Rate Expectations in Canada

Author

Listed:
  • Grahame Johnson

Abstract

Financial market expectations regarding future policy actions by the Bank of Canada are an important input into the Bank's decision-making process, and they can be measured using a variety of sources. The author develops a simple expectations-based model to focus on measuring interest rate expectations that are implied by the current level of money market yields. The explanatory power of this model increases markedly in the period following the implementation of the Bank's regime of fixed announcement dates in November 2000, and it appears to accurately describe the behaviour of short-term yields. Term premiums are estimated for the various instruments examined, and observed market yields are adjusted by those amounts. Once the market yields are adjusted, they can be used to calculate implied forward rates for a series of dates in the future. These forward rates can be interpreted as representing the market's expectations for the future level of overnight rates at a specific date.

Suggested Citation

  • Grahame Johnson, 2003. "Measuring Interest Rate Expectations in Canada," Staff Working Papers 03-26, Bank of Canada.
    • Handle: RePEc:bca:bocawp:03-26
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    References listed on IDEAS

    as
    1. Gurkaynak, Refet S. & Sack, Brian T. & Swanson, Eric P., 2007. "Market-Based Measures of Monetary Policy Expectations," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 201-212, April.
    2. Jean-Yves Paquette & David Stréliski, 1998. "The use of forward rate agreements in Canada," Bank of Canada Review, Bank of Canada, vol. 1998(Spring), pages 57-71.
    3. Walid Hejazi & Huiwen Lai & Xian Yang, 2000. "The expectations hypothesis, term premia, and the Canadian term structure of interest rates," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 33(1), pages 133-148, February.
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    5. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 129-152, Summer.
    6. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1981. "A Re-examination of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 36(4), pages 769-799, September.
    7. C. Steven Cole & William Reichenstein, 1994. "Forecasting interest rates with eurodollar futures rates," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 14(1), pages 37-50, February.
    8. Brian P. Sack, 2002. "Extracting the expected path of monetary policy from futures rates," Finance and Economics Discussion Series 2002-56, Board of Governors of the Federal Reserve System (U.S.).
    9. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 173-224.
    10. 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.
    11. Durré, Alain & Evjen, Snorre & Pilegaard, Rasmus, 2003. "Estimating risk premia in money market rates," Working Paper Series 221, European Central Bank.
    12. Walid Hejazi & Huiwen Lai & Xian Yang, 2000. "The expectations hypothesis, term premia, and the Canadian term structure of interest rates," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 133-148, February.
    13. Francis A. Longstaff, 2000. "Arbitrage and the Expectations Hypothesis," Journal of Finance, American Finance Association, vol. 55(2), pages 989-994, April.
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    Cited by:

    1. Tiff Macklem, 2005. "Commentary : central bank communication and policy effectiveness," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 475-494.
    2. Chris D'Souza & Ingrid Lo & Stephen Sapp, 2007. "Price Formation and Liquidity Provision in Short-Term Fixed Income Markets," Staff Working Papers 07-27, Bank of Canada.
    3. Bo Young Chang & Bruno Feunou, 2013. "Measuring Uncertainty in Monetary Policy Using Implied Volatility and Realized Volatility," Staff Working Papers 13-37, Bank of Canada.
    4. Lahmiri, Salim, 2016. "Interest rate next-day variation prediction based on hybrid feedforward neural network, particle swarm optimization, and multiresolution techniques," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 444(C), pages 388-396.

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    More about this item

    Keywords

    Financial markets; Interest rates;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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