Economics at your fingertips  

Estimating nominal interest rate expectations: Overnight indexed swaps and the term structure

Simon Lloyd

Journal of Banking & Finance, 2020, vol. 119, issue C

Abstract: 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)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Estimating nominal interest rate expectations: overnight indexed swaps and the term structure (2018) Downloads
Working Paper: Estimating Nominal Interest Rate Expectations: Overnight Indexed Swaps and the Term Structure (2017) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.jbankfin.2020.105915

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Nithya Sathishkumar ().

Page updated 2021-04-09
Handle: RePEc:eee:jbfina:v:119:y:2020:i:c:s0378426620301771