The Forward Premium in Short-Term Rates

Angelo Ranaldo and Matthias Rupprecht ()

No 1619, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: This paper provides the first systematic study of the temporal and cross-sectional variation in the risk premium of the expectations hypothesis (EH) at very short end of the term structure. Using a unique and comprehensive dataset of European repurchase (repo) rates, we explain the sources and time variation affecting the risk premium. Our results show that the EH cannot be rejected when loans are secured by safe collateral and that unconventional monetary policy can substantially reduce risk premiums. By contrast, the EH is violated when interest rates are affected by funding risk and collateral risk.

Keywords: Expectations hypothesis; repo; forward premium; interest rates (search for similar items in EconPapers)
JEL-codes: D01 E43 E52 G10 G21 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2016-10, Revised 2019-09
New Economics Papers: this item is included in nep-ifn, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2016:19

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