Estimating nominal interest rate expectations: Overnight indexed swaps and the term structure
Journal of Banking & Finance, 2020, vol. 119, issue C
No-arbitrage dynamic term structure models (DTSMs) have regularly been used to estimate interest rate expectations and term premia, but are beset by empirical challenges. I propose augmenting DTSMs with overnight indexed swap (OIS) rates to better estimate the decomposition along the term structure at daily frequencies. A Gaussian affine DTSM, augmented with 3 to 24-month OIS rates, generates estimates of US expectations that closely correspond to survey-implied measures out to a 10-year horizon and are more stable across sub-samples, compared to existing models. In addition, I provide narrative evidence, in the form of an event study around US unconventional monetary policy announcements, to further exemplify the benefits from OIS augmentation.
Keywords: Dynamic term structure model; Monetary policy expectations; Overnight indexed swaps; Term premia; Term structure of interest rates (search for similar items in EconPapers)
JEL-codes: C32 C58 E43 E47 G12 (search for similar items in EconPapers)
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Working Paper: Estimating nominal interest rate expectations: overnight indexed swaps and the term structure (2018)
Working Paper: Estimating Nominal Interest Rate Expectations: Overnight Indexed Swaps and the Term Structure (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:119:y:2020:i:c:s0378426620301771
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