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Testing the liquidity preference hypothesis using survey forecasts

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  • Ornelas, Jose Renato Haas
  • Silva Jr., Antonio Francisco de Almeida

Abstract

We evaluate the liquidity preference hypothesis (LPH) for the term structure of interest rates in a different way. Instead of using bond returns as traditional approaches, we use interest rate surveys with market expectations in order to evaluate LPH. This approach allows us to disentangle the effect of the changes in interest rate expectations from the liquidity premium. We found empirical support for the LPH with Brazilian data using both traditional and survey methods. However, the evaluation with interest rate surveys gives a higher statistical confidence level than the traditional approach when we perform tests for term premium monotonicity.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:ememar:v:23:y:2015:i:c:p:173-185
    DOI: 10.1016/j.ememar.2015.04.006
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    More about this item

    Keywords

    Liquidity preference hypothesis; Interest rates; Term premium; Survey forecast;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G1 - Financial Economics - - General Financial Markets

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