Interbank interest rates and the risk premium

Henri Pagès ()

No 81, BIS Working Papers from Bank for International Settlements

Abstract: The paper presents a one-factor affine model of the term structure of Libor rates with autocorrelated measurement errors. It can be viewed as a central tendency model, with the theoretical arbitrage-free rates serving as stochastic means to which the observed rates revert. Two estimation techniques are compared, one based on a no-measurement-error assumption, the other on Kalman filtering. The estimates are then used in standard yield spread regressions with a view to accounting for the departure of future short rates from what the expectations hypothesis would predict.

Pages: 44 pages
Date: 1999-11
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Citations: View citations in EconPapers (1)

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