Measuring monetary policy expectations

Abstract

We evaluate the accuracy of the fixed-income market in pricing for future movements in monetary policy. Yields implied by market pricing on various fixed-income securities are regressed on returns on the cash rate over corresponding periods. Where the market pricing is subject to risk premia, instrumental variables are used to strip away the effects of the risk premia as if they were measurement errors. When we apply our framework to Australian fixed-income pricing from 2004 to 2010, we find that, consistent with findings in the extant literature, the market is quite effective in forecasting cash rate movements over horizons of up to six months. Beyond that horizon, the presence of risk premia diminishes to a large extent the signal on expectations in market pricing, but our instrumental variables framework suggests, nonetheless, that there is important information in fixed-income market pricing regarding expected cash rate movements over the one to three-year horizon. JEL Classification: E43, G12

Interpreting survey-based federal funds rate forecasts: how accurate are they in reflecting market expectations

“…Therefore, a risk premium is built into the market price. As found by Murik (2012), the market is quite effective in forecasting interest rates up to a horizon of six months, and, beyond this horizon, the risk premium tends to cause a bias to the forecast. Consequently, market-based forecasts are also generally higher than the true market expectations, particularly during periods of market stress where the risk premium tends to be higher than in normal times.…”

“…However, to the best of our knowledge, none of them explicitly points out the fact that these surveys are asking the respondents to provide the most likely outcome they perceive rather than the outcome they expect in the sense of a probability-weighted average of all possible outcomes. Instead, a number of these studies focus on using these survey forecasts to correct the biases in market-based forecasts (Murik, 2012;Kim and Orphanides, 2012;Chun, 2011). For studies that exclusively focus on surveys of interest rate or macroeconomic forecasts, Ichiue and Yuyama (2009) finds that survey-based forecasts tend to exceed the one based on rational expectation on average for the reason that these forecasts are inertial.…”

Injecting liquidity into liquidity research

“…Zeldes ( In an Australian setting, Murik (2013a) evaluates the ability of the fixed-income market in forecasting future movements in monetary policy. To this end, he finds that the market is quite effective in forecasting cash rate movements over horizons of up to six months and that there is important information in fixed-income market pricing regarding expected cash rate movements over the one to three-year horizon.…”

Interpreting Survey-Based Federal Funds Rate Forecasts: How Accurate Are They in Reflecting Market Expectations?

“…However, to the best of our knowledge, none of them explicitly points out the fact that these surveys are asking the respondents to provide the most likely outcome they perceive rather than the outcome they expect in the sense of a probability-weighted average of all possible outcomes. Instead, a number of these studies focus on using these survey forecasts to correct the biases in market-based forecasts (Murik, 2012;Kim and Orphanides, 2012;Chun, 2011). For studies that exclusively focus on surveys of interest rate or macroeconomic forecasts, Ichiue and Yuyama (2009) finds that survey-based forecasts tend to exceed the one based on rational expectation on average for the reason that these forecasts are inertial.…”