Estimating Risk Premia in Money Market Rates

65 Pages Posted: 4 Jun 2003

See all articles by Alain Durré

Alain Durré

European Central Bank (ECB) - Directorate General Economics; IéSEG - Université Catholique de Lille; National Center for Scientific Research - LEM

Snorre Evjen

Norges Bank - Research Department

Rasmus Pilegaard

European Central Bank (ECB)

Date Written: April 2003

Abstract

This paper empirically tests the expectations hypothesis on both daily EONIA swap rates and monthly EURIBOR rates extended backwards with German LIBOR rates. In addition, we quantify the size of the risk premia in the money market at maturities of one, three, six and nine months. Using implied forward and spot rates in a cointegrated VAR model, we find that the data support the expectations hypothesis in the euro area and in Germany prior to 1999. We find that risk premia are relatively limited at the shorter maturities but more significant at maturities of six and nine months. Furthermore, the results on LIBOR/EURIBOR rates tentatively indicate a downward shift in the structure of the risk premia after the introduction of the euro.

Keywords: Term structure of interest rates, Expectations hypothesis, cointegrated VAR models

JEL Classification: E43, C32

Suggested Citation

Durre, Alain C. J. and Evjen, Snorre and Pilegaard, Rasmus, Estimating Risk Premia in Money Market Rates (April 2003). ECB Working Paper No. 221, Available at SSRN: https://ssrn.com/abstract=411584

Alain C. J. Durre

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

IéSEG - Université Catholique de Lille ( email )

3, rue de la Digue
F-59800 Lille
France

National Center for Scientific Research - LEM ( email )

106-112 Boulevard de l'Hopital
F- 75647 Paris Cedex 13
France

Snorre Evjen

Norges Bank - Research Department ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Rasmus Pilegaard (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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