This paper is an empirical investigation of the predictability and
comovement of risk premia in the term structure of Euromarket interest
rates. We show that variables which have been used as proxies for risk
premia on uncovered foreign asset positions also predict excess returns in
Euroniarket term structures, while variables which have been used as proxies
for risk premia in the term structure also predict excess returns on taking
uncovered foreign asset positions. These findings suggests that risk premia
in the Euromarket term structures and on uncovered foreign asset positions
move together. We test formally the hypothesis that risk premia on uncovered
3-month EuroDM and Eurosterling deposits move in proportion to a single
latent variable. We are unable to reject this hypothesis. We are also
unable to reject the hypothesis that the risk premia on these three strategies
and those on rolling over 1-month Eurosterling (EuroDM) deposits versus
holding a 3-month Eurosterlirig (EuroDN) deposit move in proportion to a
single latent variable. The single latent variable model can be interpreted
atheoretically, as a way of characterizing the extent to which predictable
asset returns "move together"; or it can be interpreted as in Hansen and
Hodrick (1983) and Hodrick and Srivastava (1983) as a specialization of the
ICAPM in which assets have constant betas on a single, unobservable benchmark
portfolio.
Published: Campbell, John Y. and Richard H. Clarida. "The Term Structure of Euromarket Interest Rates: An Empirical Investigation," Journal of Monetary Economics, Vol. 19, No. 1, (January 1987), pp. 25-44.
This paper is available as PDF (365 K) or DjVu (242 K) (Download viewer) or via email.
Machine-readable bibliographic record -
MARC,
RIS,
BibTeX
