Testing the liquidity preference hypothesis using survey forecasts

Jose Ornelas and Antonio Francisco Silva Junior

Emerging Markets Review, 2015, vol. 23, issue C, 173-185

Abstract: We evaluate the liquidity preference hypothesis (LPH) for the term structure of interest rates in a different way. Instead of using bond returns as traditional approaches, we use interest rate surveys with market expectations in order to evaluate LPH. This approach allows us to disentangle the effect of the changes in interest rate expectations from the liquidity premium. We found empirical support for the LPH with Brazilian data using both traditional and survey methods. However, the evaluation with interest rate surveys gives a higher statistical confidence level than the traditional approach when we perform tests for term premium monotonicity.

Keywords: Liquidity preference hypothesis; Interest rates; Term premium; Survey forecast (search for similar items in EconPapers)
JEL-codes: C58 E43 E58 G1 (search for similar items in EconPapers)
Date: 2015
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Working Paper: Testing the Liquidity Preference Hypothesis using Survey Forecasts (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:23:y:2015:i:c:p:173-185

DOI: 10.1016/j.ememar.2015.04.006

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