Download This PaperThe Forward Premium in Short-Term Rates
38 Pages Posted: 15 Oct 2016 Last revised: 5 Sep 2019
Date Written: September 5, 2019
Abstract
This paper provides the first systematic study of the temporal and cross-sectional variation in the forward premium in very short-term rates. Using a unique and comprehensive data set of European repurchase agreements (repo), we find that the forward premium varies significantly with the (net) demand for borrowing and funding risk. Conditional tests of the unbiasedness hypothesis reveal that the Expectations Hypothesis (EH) cannot be rejected when funding liquidity risk is low and the demand is balanced. Overall, funding liquidity risk is the main driver affecting the short end of the term structure, and the validity of the EH depends on funding risk premiums and demand for funding immediacy.
Keywords: expectations hypothesis, repo, forward premium, interest rates
JEL Classification: D01, E43, E52, G10, G21
Suggested Citation: Suggested Citation
Angelo Ranaldo (Contact Author)
University of St. Gallen ( email )
School of Finance
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)
HOME PAGE: http://fin-sr.unisg.ch
Swiss Finance Institute ( email )
c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland
+41796637711 (Phone)
HOME PAGE: http://www.sfi.ch/de/about-us/news/hsg-faculty-members
Matthias Rupprecht
University of St. Gallen - School of Finance ( email )
Unterer Graben 21
St.Gallen, CH-9000
Switzerland