Overnight Indexed Swap Market-Based Measures of Monetary Policy Expectations
Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
A growing literature has begun to use overnight indexed swap (OIS) rates to measure market expectations of future short-term interest rates. In this paper, I assess the empirical success of OIS rates in predicting the future path of monetary policy. I first compare US OIS rates to federal funds futures (FFFs), which have regularly been used to construct financial market-based measures of interest rate expectations. For the 2002-2016 period, I find that 1 to 11-month OIS rates provide measures of investors' interest rate expectations that are as good as those from comparable-horizon FFFs contracts. More generally, I find that, on average, 1 to 24-month US, UK, Eurozone and Japanese OIS rates accurately measure expectations of future short-term interest rates. To date, many methods used by monetary economists rely on FFFs data to measure monetary policy expectations. This has limited the application of these methods to US data only. Motivated by the results in this paper, researchers can look to OIS rates as a globally-comparable measure of monetary.
Keywords: Federal Funds Futures; Overnight Indexed Swaps; Monetary Policy Expectations (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Working Paper: Overnight index swap market-based measures of monetary policy expectations (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1733
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