Interbank interest rates and the risk premium
BIS Working Papers
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No
81
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03 November 1999
The paper presents a one-factor affine model of the term structure of Libor
rates with autocorrelated measurement errors. It can be viewed as a central
tendency model, with the theoretical arbitrage-free rates serving as stochastic
means to which the observed rates revert. Two estimation techniques are
compared, one based on a no-measurement-error assumption, the other on Kalman
filtering. The estimates are then used in standard yield spread regressions with
a view to accounting for the departure of future short rates from what the
expectations hypothesis would predict.