Bonds, Currencies and Expectational Errors
Granziera, Eleonora; Sihvonen, Markus (15.01.2024)
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Volyymi
158Numero
January 2024
2024
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-202109131538Tiivistelmä
We propose a model in which sticky expectations concerning short-term interest rates generate joint predictability patterns in bond and currency markets. Our parsimonious specification can explain the downward sloping term structure of carry trade returns, difficult to replicate in a rational expectations framework. We offer empirical support for our approach and show that including a sticky short rate expectations channel into a standard affine term structure allows the model to better capture the drift patterns in the data.
Julkaisuhuomautus
Also published as a Bank of Finland Discussion Paper 7/2020
https://urn.fi/URN:NBN:fi:bof-202004282097
https://urn.fi/URN:NBN:fi:bof-202004282097