NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Term Structure of Euromarket Interest Rates: An Empirical Investigation

John Y. Campbell, Richard H. Clarida

NBER Working Paper No. 1946 (Also Reprint No. r0841)
Issued in June 1986
NBER Program(s):   ME   ITI   IFM

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.

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Document Object Identifier (DOI): 10.3386/w1946

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. citation courtesy of

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