The Term Structure of Euromarket Interest Rates: an Empirical Investigation

35 Pages Posted: 11 Apr 2007 Last revised: 29 Oct 2022

See all articles by John Y. Campbell

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Richard Clarida

Columbia University - Graduate School of Arts and Sciences - Department of Eco; National Bureau of Economic Research (NBER)

Date Written: June 1986

Abstract

This paper is an empirical investigation of the predictability andcomovement of risk premia in the term structure of Euromarket interestrates. We show that variables which have been used as proxies for riskpremia on uncovered foreign asset positions also predict excess returns inEuroniarket term structures, while variables which have been used as proxiesfor risk premia in the term structure also predict excess returns on takinguncovered foreign asset positions. These findings suggests that risk premiain the Euromarket term structures and on uncovered foreign asset positionsmove together. We test formally the hypothesis that risk premia on uncovered3-month EuroDM and Eurosterling deposits move in proportion to a singlelatent variable. We are unable to reject this hypothesis. We are alsounable to reject the hypothesis that the risk premia on these three strategiesand those on rolling over 1-month Eurosterling (EuroDM) deposits versusholding a 3-month Eurosterlirig (EuroDN) deposit move in proportion to asingle latent variable. The single latent variable model can be interpretedatheoretically, as a way of characterizing the extent to which predictableasset returns "move together"; or it can be interpreted as in Hansen andHodrick (1983) and Hodrick and Srivastava (1983) as a specialization of theICAPM in which assets have constant betas on a single, unobservable benchmarkportfolio.

Suggested Citation

Campbell, John Y. and Clarida, Richard H., The Term Structure of Euromarket Interest Rates: an Empirical Investigation (June 1986). NBER Working Paper No. w1946, Available at SSRN: https://ssrn.com/abstract=979502

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