Working Paper No. 55
By Marco Rossi
This paper analyses two related questions on short-term interest rate expectations. First, whether the expectations theory of the term structure of interest rates holds at shorter horizon and, secondly, whether there is useful information in shorter-term interest rates. It uses both the slope of the yield curve (spread analysis) and forward rates within a general vector error correction framework and compares results from gilt yields and interbank rates. It finds that only London interbank rates are unbiased estimators of future interest rates outcomes and that, although current yields contain some information about future spot yields, this is not as much as in interbank rates.
The Information Content of the Short End of the Term Structure of Interest Rates