Arbeitspapier

Predicting risk premia in short-term interest rates and exchange rates

We assess the ability of yield curve factors to predict risk premia in short-term interest rates and exchange rates across a large sample of major advanced economies. We find that the same tick-shaped linear combination of (relative) bond yields predicts risk premia in both short-term interest rates and exchange rates at returnforecasting horizons of up to six months for all (but one) countries and currencies in our sample. Our single forecasting factor loads positively on the short and long end of the curve and negatively on the medium-term and is therefore inversely related to Nelson-Siegel's curvature factor. In line with recent interpretations of the yield curve factors, our findings suggest that the hump of the yield curve bears important information about future short-term interest rates. A relatively high curvature predicts a surprise rise in short-term interest rates beyond expectations and, coincidentally, an appreciation of the home currency in line with uncovered interest rate parity.

ISBN
978-92-899-3236-3
Sprache
Englisch

Erschienen in
Series: ECB Working Paper ; No. 2131

Klassifikation
Wirtschaft
Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models
Forecasting Models; Simulation Methods
Portfolio Choice; Investment Decisions
Thema
Exchange rates
Interest rates
Risk premia
Yield curve
Predictability

Ereignis
Geistige Schöpfung
(wer)
Gräb, Johannes
Kostka, Thomas
Ereignis
Veröffentlichung
(wer)
European Central Bank (ECB)
(wo)
Frankfurt a. M.
(wann)
2018

DOI
doi:10.2866/298754
Handle
Letzte Aktualisierung
10.03.2025, 11:41 MEZ

Datenpartner

Dieses Objekt wird bereitgestellt von:
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.

Objekttyp

  • Arbeitspapier

Beteiligte

  • Gräb, Johannes
  • Kostka, Thomas
  • European Central Bank (ECB)

Entstanden

  • 2018

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