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Estimating risk premia in money market rates

Author

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  • Durré, Alain
  • Evjen, Snorre
  • Pilegaard, Rasmus

Abstract

This paper empirically tests the expectations hypothesis on both daily EONIA swap rates and monthly EURIBOR rates extended backwards with German LIBOR rates. In addition, we quantify the size of the risk premia in the money market at maturities of one, three, six and nine months. Using implied forward and spot rates in a cointegrated VAR model, we find that the data support the expectations hypothesis in the euro area and in Germany prior to 1999. We find that risk premia are relatively limited at the shorter maturities but more significant at maturities of six and nine months. Furthermore, the results on LIBOR/EURIBOR rates tentatively indicate a downward shift in the structure of the risk premia after the introduction of the euro. JEL Classification: E43, C32

Suggested Citation

  • Durré, Alain & Evjen, Snorre & Pilegaard, Rasmus, 2003. "Estimating risk premia in money market rates," Working Paper Series 221, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2003221
    Note: 343102
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp221.pdf
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    References listed on IDEAS

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    2. Gabriel Pérez Quirós & Jorge Sicilia, 2002. "Is the European Central Bank (and the United States Federal Reserve) predictable?," Working Papers 0229, Banco de España;Working Papers Homepage.
    3. Joyce, Michael & Relleen, Jonathan & Sorensen, Steffen, 2008. "Measuring monetary policy expectations from financial market instruments," Bank of England working papers 356, Bank of England.
    4. Denise Côté & Christopher Graham, 2004. "Convergence of Government Bond Yields in the Euro Zone: The Role of Policy Harmonization," Staff Working Papers 04-23, Bank of Canada.
    5. Sónia Costa & Ana Beatriz Galvão, 2007. "The Forward Premium of Euro Interest Rates," Working Papers w200702, Banco de Portugal, Economics and Research Department.
    6. Galvao, Ana Beatriz & Costa, Sonia, 2013. "Does the euro area forward rate provide accurate forecasts of the short rate?," International Journal of Forecasting, Elsevier, vol. 29(1), pages 131-141.
    7. Grahame Johnson, 2003. "Measuring Interest Rate Expectations in Canada," Staff Working Papers 03-26, Bank of Canada.
    8. Durré Alain, 2006. "The Liquidity Premium in the Money Market: A Comparison of the German Mark Period and the Euro Area," German Economic Review, De Gruyter, vol. 7(2), pages 163-187, May.
    9. Renne Jean-Paul, 2017. "A model of the euro-area yield curve with discrete policy rates," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 21(1), pages 99-116, February.
    10. Viktors Ajevskis & Kristine Vitola, 2006. "A Factor Model of the Term Structure of Interest Rates and Risk Premium Estimation for Latvia's Money Market," Working Papers 2006/01, Latvijas Banka.
    11. Gabriel Pérez Quirós & Jorge Sicilia, 2002. "Is the European Central Bank (and the United States Federal Reserve) predictable?," Working Papers 0229, Banco de España.

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    More about this item

    Keywords

    co-integrated VAR models; expectations hypothesis; term structure of interest rates;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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