How to Extract Short-Rate Expectations from the Extended Vasicek Model

10 Pages Posted: 5 Oct 2012

See all articles by Thomas Braun

Thomas Braun

Bielefeld University - Department of Business Administration and Economics

Date Written: September 29, 2012

Abstract

This paper deals with how reasonable it is to accept the pure expectations hypothesis as a guide to the expected future development of the economy as indicated by the expected future short rate. At this aim it tries to extract short rate expectations from the observable term structure of interest rates, short rate volatility and market prices of bund-futures options within the framework of an extended version of Vasicek’s prominent 1977 one-factor-no-arbitrage model. Doing so has its merits in teaching too because it allows to precisely disentangle the interwined concepts of the market price of zerobond price risk on the one hand and term or liquidity premium on the other.

Keywords: extended Vasicek model, term structure of interest rates, expectations hypothesis, liquidity premia, term premia

JEL Classification: G12

Suggested Citation

Braun, Thomas, How to Extract Short-Rate Expectations from the Extended Vasicek Model (September 29, 2012). Available at SSRN: https://ssrn.com/abstract=2156967 or http://dx.doi.org/10.2139/ssrn.2156967

Thomas Braun (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

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