Explaining the Failure of the Expectations Hypothesis with Short-Term Rates
This paper provides the first systematic study of the temporal and cross-sectional variation in the risk premium of the expectations hypothesis (EH) at very short end of the term structure. Using a unique and comprehensive dataset of European repurchase (repo) rates, we explain the sources and time variation affecting the risk premium. Our results show that the EH cannot be rejected when loans are secured by safe collateral and that unconventional monetary policy can substantially reduce risk premiums. By contrast, the EH is violated when interest rates are affected by funding risk and collateral risk.
contribution to scientific community
EFA European Finance Association, 44th Annual Meeting
23. - 26. August 2017