DP3187 Interpreting the Term Structure of Interbank Rates in Hong Kong

Author(s): Stefan Gerlach
Publication Date: February 2002
Keyword(s): expectations hypothesis, hong kong, term structure of interest rates
JEL(s): E43
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3187

This Paper studies the term structure of short-term interbank rates in Hong Kong. Principal component analysis suggests that the variation of the term structure can be largely attributed to two components that capture shifts in the level and slope of the yield curve. We find that term spreads contain no information about future short-term rates. The Expectations Hypothesis, which states that long-term rates depend on expected future short-term rates plus a constant term premium, is also soundly rejected by the data. We are, however, unable to reject a modified version of the EH that incorporates time-varying term premia.