Estimating nominal interest rate expectations: overnight indexed swaps and the term structure

Simon Lloyd

No 763, Bank of England working papers from Bank of England

Abstract: No-arbitrage dynamic term structure models (DTSMs) have regularly been used to estimate interest rate expectations and term premia, but are beset by an identification problem that results in inaccurate estimates. I propose the augmentation of DTSMs with overnight indexed swap (OIS) rates to better estimate interest rate expectations and term premia along the whole term structure at daily frequencies. I illustrate this with a Gaussian affine DTSM augmented with 3 to 24-month OIS rates, which provide accurate information about interest rate expectations. The OIS-augmented model generates estimates of US interest rate expectations that closely correspond to those implied by federal funds futures rates and survey expectations out to a 10-year horizon, accurately depict their daily frequency evolution, and are more stable across samples. Against these metrics, interest rate expectation estimates, and therefore term premia, from OIS-augmented models are superior to estimates from existing Gaussian affine DTSMs.

Keywords: Dynamic term structure model; monetary policy expectations; overnight indexed swaps; term premia; term structure of interest rates (search for similar items in EconPapers)
JEL-codes: C32 C58 E43 E47 G12 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2018-11-02
New Economics Papers: this item is included in nep-mac and nep-mon
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Related works:
Journal Article: Estimating nominal interest rate expectations: Overnight indexed swaps and the term structure (2020)
Working Paper: Estimating Nominal Interest Rate Expectations: Overnight Indexed Swaps and the Term Structure (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0763

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