Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Display:
Because if you have liquid forward markets in bonds, then there's a set of arbitrage relations between the overnight rate, the expected volatility of the overnight rate, and the short-maturity end of the yield curve. And the CB fixes the overnight rate.

Empirically, this breaks down more and more the farther you go from the overnight rate, for various reasons that I will not pretend to fully understand (but which are presumably related to the absence of a consensus on long-term policy rate volatility coupled with credit constraints on potential arbitrageurs preventing the actual construction of the hypothetical tracking portfolios which could enforce the relationship). But it holds up quite well for the short-maturity end.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Sep 7th, 2012 at 11:09:20 AM EST
[ Parent ]

Others have rated this comment as follows:

Display:

Top Diaries

Winning Diplomacy

by Frank Schnittger - Jul 10
18 comments

Epilogue Chris Steele

by Oui - Jul 12
2 comments

Brexiteers and Buccaneers

by Oui - Jul 7
20 comments

Municipal elections in France

by eurogreen - Jun 28
24 comments

Occasional Series