Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/245996 
Year of Publication: 
2021
Series/Report no.: 
Danmarks Nationalbank Working Papers No. 175
Publisher: 
Danmarks Nationalbank, Copenhagen
Abstract: 
We use survey expectations about future monetary policy to decompose excess returns on fed funds futures and overnight index swaps into a term premium and an expectation error component. We find that excess returns are primarily driven by expectation errors, while term premia are economically small and negative on average. Most expectation errors stem from market participants underestimating how aggressively the Federal Reserve has eased policy during the last three decades. Our findings reveal that market participants are continuously learning about the central bank's reaction function and have been slow to recognize the rising importance attributed to deteriorating financial conditions and falling stock prices. We document similar results in an international sample of six major currency areas.
Subjects: 
Interest-rate swaps
monetary policy
the money and currency markets
JEL: 
E43
E44
G12
G15
Document Type: 
Working Paper

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