Time Variation in Term Premia: International Evidence

34 Pages Posted: 27 Jul 2005

See all articles by Ron Jongen

Ron Jongen

Dutch Central Bank (DNB)

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Christian C. P. Wolff

University of Luxembourg; Centre for Economic Policy Research (CEPR)

Date Written: March 2005

Abstract

This paper examines the validity of the expectations hypothesis of the term structure of interest rates by means of a previously unexploited dataset of market expectations that covers a broad range of EMS versus non-EMS foreign currency deposits. Although we find strong evidence in favor of rejecting the 'pure' version of the expectations hypothesis, we still cannot reject the hypothesis that the forward rate is a biased estimate of future interest rate levels. Nevertheless, we find some evidence that the behavior of market participants, when making predictions about the future level of interest rates, is not entirely in line with what rational behavior would suggest. We also find that there is strong evidence of time-variation in the term structure of interest rates. Furthermore, while this variation in term premia can be very well explained by low-order variations of the ARMA class models, there is sufficient evidence that the conditional heteroskedasticity of term premia plays an important role in explaining the time-variation. Finally, no significant difference is found between the behavior of EMS interest rate deposits and non-EMS deposits.

Keywords: Interest rate expectations, EMS, expectations hypothesis, rationality, survey data, term structure, time-varying term premia

JEL Classification: E42, E43, G15

Suggested Citation

Jongen, Ron and Verschoor, Willem F. C. and Wolff, Christian C. P., Time Variation in Term Premia: International Evidence (March 2005). CEPR Discussion Paper No. 4959, Available at SSRN: https://ssrn.com/abstract=771464

Ron Jongen

Dutch Central Bank (DNB) ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Christian C. P. Wolff (Contact Author)

University of Luxembourg ( email )

6, rue Richard Coudenhove-Kalergi
Kirchberg Campus
Luxembourg, South 1359
Luxembourg

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
16
Abstract Views
948
PlumX Metrics