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Extracting market expectations from yield curves augmented by money market interest rates: the case of Japan

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  • Nagano, Teppei
  • Baba, Naohiko

Abstract

This paper attempts to extract market expectations about the Japanese economy and the BOJ's policy stance from the yen yield curves augmented by money market interest rates, during the period from the end of the quantitative easing policy in March 2006. We use (i) the swap yield curves augmented by OIS interest rates (OIS/Swap), and (ii) the JGB yield curve augmented by FB/TB interest rates. First, using the Nelson-Siegel [1987] model, we estimate three latent dynamic factors, which can be interpreted as reflecting market expectations. Second, we investigate the relative importance of price discovery for each factor between OIS/Swap and FBTB/JGB, and find that the former has a more dominant role of price discovery for all factors. Third, we estimate the efficient price for each factor common to both yield curves using a time-series structural model, which enables us to decompose each factor into the efficient price and idiosyncratic factor. JEL Classification: E43, E52, G12

Suggested Citation

  • Nagano, Teppei & Baba, Naohiko, 2008. "Extracting market expectations from yield curves augmented by money market interest rates: the case of Japan," Working Paper Series 980, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2008980
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp980.pdf
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    Cited by:

    1. Vijay A Murik, 2013. "Measuring monetary policy expectations," Australian Journal of Management, Australian School of Business, vol. 38(1), pages 49-65, April.

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    More about this item

    Keywords

    overnight index swap; price discovery; structural time-series model; swap spread; Yield curve;
    All these keywords.

    JEL classification:

    • 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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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