The Forward Premium in Short-Term Rates

38 Pages Posted: 15 Oct 2016 Last revised: 5 Sep 2019

See all articles by Angelo Ranaldo

Angelo Ranaldo

University of St. Gallen; University of St. Gallen - School of Finance

Matthias Rupprecht

University of St. Gallen - School of Finance

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

Ranaldo, Angelo and Rupprecht, Matthias, The Forward Premium in Short-Term Rates (September 5, 2019). University of St.Gallen, School of Finance Research Paper No. 2016/19. Available at SSRN: https://ssrn.com/abstract=2851804 or http://dx.doi.org/10.2139/ssrn.2851804

Angelo Ranaldo (Contact Author)

University of St. Gallen ( email )

Swiss Institute of Banking and Finance s/bf-HSG
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)

HOME PAGE: http://www.sbf.unisg.ch/Lehrstuehle/Lehrstuhl_Ranaldo/Homepage_Ranaldo.aspx

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Matthias Rupprecht

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Register to save articles to
your library

Register

Paper statistics

Downloads
114
Abstract Views
668
rank
243,916
PlumX Metrics