A New Approach to Measuring Market Expectations and Term Premia

Posted: 27 Aug 2012 Last revised: 21 Feb 2017

See all articles by Xiaoxia Ye

Xiaoxia Ye

University of Liverpool Management School

Date Written: February 4, 2015

Abstract

This paper develops a novel approach to measure the market expectations and term premia in the term structure of interest rates. Key components of this approach are generic impact measures of state variables in a Gaussian dynamic term structure model. These measures are inherent in a particular state variable regardless of how other state variables are defined within the model. With the help of these measures, the approach gives rise to market expectations predicting yield changes well, and term premia having a legitimate impact on the forward curve. In the empirical analysis, I show the generic impact of the short rate on the yield curve, and historical dynamics of market expectations and term premia. The calibrated model is also employed to study the impacts of recent unconventional monetary policies.

Updated term premium estimates are available at https://sites.google.com/site/wisesummer/Home/research/updated_data_for_ye-2015

Keywords: term structure of interest rates, market expectations, short rate, LSAP, MEP, QE3

JEL Classification: E43

Suggested Citation

Ye, Xiaoxia, A New Approach to Measuring Market Expectations and Term Premia (February 4, 2015). Journal of Fixed Income, Spring 2015, Vol. 24, No. 4: pp. 22-46, Available at SSRN: https://ssrn.com/abstract=2136771 or http://dx.doi.org/10.2139/ssrn.2136771

Xiaoxia Ye (Contact Author)

University of Liverpool Management School ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

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