In Search of Time-Varying Term Premia in the London Interbank Market

Stan Hurn, A D McDonald and T Moody

Scottish Journal of Political Economy, 1995, vol. 42, issue 2, 152-64

Abstract: The market for interbank deposits provides a suitable context in which to investigate the significance of time-varying term premia in the term structure of interest rates. Recently proposed specification tests are used to identify autoregressive conditional heteroscedasticity in holding-period excess returns which incorporate errors in forecasting future short rates. Although there are sound economic grounds for expecting heteroscedastic-dependent time varying term premia, GARCH-M parameter estimates, using monthly LIBOR data for the period 1976-92, indicate that they are not an important feature of the interbank term structure, at least in the maturity range of one to six months. Copyright 1995 by Scottish Economic Society.

Date: 1995
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Scottish Journal of Political Economy is currently edited by Tim Barmby, Andrew Hughes-Hallett and Campbell Leith

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