Template-Type: ReDIF-Paper 1.0
Author-Name: Maik Schmeling
Author-X-Name-First: Maik 
Author-X-Name-Last: Schmeling
Author-Name: Andreas Schrimpf
Author-X-Name-First: Andreas 
Author-X-Name-Last: Schrimpf
Author-Name: Sigurd A. M. Steffensen
Author-X-Name-First: Sigurd A. M. 
Author-X-Name-Last: Steffensen
Title: Monetary policy expectation errors
Abstract: How are financial markets pricing the monetary policy outlook? We use survey expectations to decompose excess returns on money market instruments into term premia and expectation errors. We find excess returns to be driven primarily by expectation errors, whereas term premia are negligible. Our findings point to challenges faced by investors in learning about the Federal Reserve's response to large, but infrequent, negative shocks in real-time. Rather than reflecting risk compensation, excess returns stem from investors underestimating by how much the central bank has eased in response to such rare shocks. We document similar results in an international sample.
Length: 83 pages
Creation-Date: 2022-01
File-URL: https://www.bis.org/publ/work996.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work996.htm
File-Format: text/html
Number: 996
Keywords: expectation formation, monetary policy, federal funds futures, overnight index swaps, uncertainty.
Classification-JEL: E43, E44, G12, G15.
Handle: RePEc:bis:biswps:996