Bonds, currencies and expectational errors

Eleonora Granziera and Markus Sihvonen

Journal of Economic Dynamics and Control, 2024, vol. 158, issue C

Abstract: We propose a model in which sticky expectations concerning short-term interest rates generate joint predictability patterns in bond and currency markets. Our parsimonious specification can explain the downward sloping term structure of carry trade returns, difficult to replicate in a rational expectations framework. We offer empirical support for our approach and show that including a sticky short rate expectations channel into a standard affine term structure allows the model to better capture the drift patterns in the data.

Keywords: Bond and currency premia; Sticky expectations; Interest rate forecast errors (search for similar items in EconPapers)
JEL-codes: D84 E43 F31 (search for similar items in EconPapers)
Date: 2024
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Related works:
Working Paper: Bonds, currencies and expectational errors (2020)
Working Paper: Bonds, currencies and expectational errors (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:158:y:2024:i:c:s0165188923001963

DOI: 10.1016/j.jedc.2023.104790

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