Journal
JOURNAL OF INTERNATIONAL FINANCIAL MARKETS INSTITUTIONS & MONEY
Volume 35, Issue -, Pages 85-101Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.intfin.2015.01.004
Keywords
Expectations hypothesis; Survey data; Time varying risk premium; Consumer sentiment; Cointegrated VAR; Zero lower bound
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Monthly interest rate forecasts from nearly 50 major financial institutions are used to examine the expectations hypothesis at the short end of the term structure for the Canadian T-bill market and Libor markets in the US, UK, and Switzerland. Using CVARs, the term premium is found to move inversely with consumer sentiment in all four samples at the 1% level. Extension to the polynomial CVAR also suggests that a fall in the interest rate raises the premium, at least temporarily. This is interpreted as arising from the decreasing upside potential for bond price movements related to the zero lower bound. (C) 2015 Elsevier B.V. All rights reserved.
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