Working Paper: CEPR ID: DP3187
Authors: Stefan Gerlach
Abstract: This Paper studies the term structure of short-term interbank rates in Hong Kong. Principal component analysis suggests that the variation of the term structure can be largely attributed to two components that capture shifts in the level and slope of the yield curve. We find that term spreads contain no information about future short-term rates. The Expectations Hypothesis, which states that long-term rates depend on expected future short-term rates plus a constant term premium, is also soundly rejected by the data. We are, however, unable to reject a modified version of the EH that incorporates time-varying term premia.
Keywords: Expectations Hypothesis; Hong Kong; Term Structure of Interest Rates
JEL Codes: E43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| term structure of interbank rates (E43) | expectations of future short-term rates (E43) |
| term structure of interbank rates (E43) | term premium related to volatility (C58) |
| term spreads (G10) | future short-term rates (E43) |
| term spreads (G10) | predictions of future short-term rates (E43) |
| volatility of one-month interest rate (E43) | time-varying term premia (E43) |