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Market expectations of the short rate and the term structure of interest rates: a new perspective from the classic model

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  • Ye, Xiaoxia

Abstract

Based on the classic Gaussian dynamic term structure model A_0(3), I rotate the model to a special representation, the so called 'Companion Form Realization', in which the state variables comprises the short rate and its related expectations. This unique feature makes the representation very useful in analyzing the response of the yield curve to the shocks in the short rate and its related expectations, and monitoring market expectations. Using the estimated model, I quantify a variety of yield responses to the changes in these important state variables; and also give an 'unsurprising' pattern in which changes in state variables have little impact on the long end of the yield curve. Two case studies of recent unconventional monetary policies are also included.

Suggested Citation

  • Ye, Xiaoxia, 2012. "Market expectations of the short rate and the term structure of interest rates: a new perspective from the classic model," MPRA Paper 41093, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:41093
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    References listed on IDEAS

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    More about this item

    Keywords

    term structure of interest rates; market expectations; short rate; LSAP; MEP;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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