Extracting Market Expectations from Yield Curves Augmented by Money Market Interest Rates: The Case of Japan

42 Pages Posted: 23 Dec 2008

See all articles by Teppei Nagano

Teppei Nagano

Bank of Japan - Research and Statistics Department

Naohiko Baba

affiliation not provided to SSRN

Date Written: December 3, 2008

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.

Keywords: yield curve, overnight index swap, price discovery, structural time-series model, swap spread

JEL Classification: E43, E52, G12

Suggested Citation

Nagano, Teppei and Baba, Naohiko, Extracting Market Expectations from Yield Curves Augmented by Money Market Interest Rates: The Case of Japan (December 3, 2008). ECB Working Paper No. 980, Available at SSRN: https://ssrn.com/abstract=1310617

Teppei Nagano

Bank of Japan - Research and Statistics Department ( email )

2-1-1 Hongoku-cho
Nihonbashi
Chuo-ku Tokyo 103-8660
Japan

Naohiko Baba (Contact Author)

affiliation not provided to SSRN

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