Time-variation in term premia: International survey-based evidence

Ron Jongen, Willem Verschoor and Christian Wolff

Journal of International Money and Finance, 2011, vol. 30, issue 4, 605-622

Abstract: Using a large, previously unexplored data set of survey-based interest rate forecasts that covers a broad range of countries, this paper re-examines the expectations hypothesis of the term structure of interest rates. We find that survey-based interest rate forecasts outperform not only a random walk forecast, but also outperform forecasts from forward rates. When using these superior survey-based forecasts in a modified expectations hypothesis test, the expectations hypothesis is rejected for fewer countries, at lower significance levels, and has greater explanatory power than when using a traditional forward rates-based test. We furthermore document strong time-variation in the term premia, which is an important reason why the traditional expectations hypothesis test is rejected so frequently. This time-variation seems to arise from the changing attitudes towards risk among market participants and as a compensation for the change in liquidity in the term structure. Finally, we find that generalizing findings from earlier U.S. studies to other countries may lead to bias in the true economic relationships in these countries.

Keywords: Expectations; hypothesis; Term; structure; Time-varying; term; premia; Interest; rate; expectations; Rationality; Survey; data (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (11)

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Working Paper: Time-Variation in Term Permia: International Survey-Based Evidence (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:30:y:2011:i:4:p:605-622

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