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Extracting expectations of New Zealand's Official Cash Rate from the bank-risk yield curve

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Abstract

The hypothesis that a forward term-premium (FTP) exists between forward 1- day rates calculated from the New Zealand bank-risk yield curve and the corresponding ex-post Official Cash Rate (OCR) is tested by applying a single equation method for a cointegrated system to daily data from March 1999 to December 2001. The results indicate that the FTP is statistically significant for all forward horizons tested. The results also indicate that the estimates of the FTP appear to be an increasing function of the forward horizon, and the FTP may be tentatively represented as a simple monotonically-increasing analytical function. The model may be used in reverse to imply current ex-ante expectations of the OCR.

Suggested Citation

  • Leo Krippner, 2002. "Extracting expectations of New Zealand's Official Cash Rate from the bank-risk yield curve," Reserve Bank of New Zealand Discussion Paper Series DP2002/01, Reserve Bank of New Zealand.
    • Handle: RePEc:nzb:nzbdps:2002/01
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    References listed on IDEAS

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    1. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 129-152, Summer.
    2. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
    3. 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.
    4. Leo Krippner, 1998. "Testing the predictive power of New Zealand bank bill futures rates," Reserve Bank of New Zealand Discussion Paper Series G98/8, Reserve Bank of New Zealand.
    5. Graeme Guthrie & Julian Wright & Jun Yu, 1999. "Testing the expectations theory of the term structure for New Zealand," New Zealand Economic Papers, Taylor & Francis Journals, vol. 33(1), pages 93-114.
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    Cited by:

    1. Long H. Vo, 2014. "Application of Kalman Filter on modelling interest rates," Journal of Management Sciences, Geist Science, Iqra University, Faculty of Business Administration, vol. 1(1), pages 1-15, March.
    2. Michael Gordon, 2003. "Estimates of time-varying term premia for New Zealand and Australia," Reserve Bank of New Zealand Discussion Paper Series DP2003/06, Reserve Bank of New Zealand.

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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

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