ECB Workshop On The Analysis Of The Money Market - No 980 - Extracting Market Expectations From Yield Curves Augmented By Money Market Interest Rates, The Case Of Japan

Oct 23, 2026

This paper attempts to extract market expectations about the Japanese economy and the BOJ’s policy stance from yen yield curves augmented by money market interest rates, covering the period after the end of quantitative easing in March 2006. It uses (i) swap yield curves augmented by OIS rates and (ii) the JGB yield curve augmented by FB/TB rates. Using the Nelson-Siegel model, it estimates latent factors, compares price discovery contributions, and applies a time-series structural model to decompose each factor into efficient price and idiosyncratic components.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages42

Reading Time1 h 46 min

AccessFree to download

Abstract

1 Introduction

2 Estimation of latent dynamic factors capturing market expectations

3 Evaluating price discovery using a reduced-form model

4 Extracting market expectations using a structural time-series model

5 Concluding remarks

References

Tables and Figures

Working PaPer SerieS no 980 / DeceMBer 2008 extracting Market exPectationS froM YielD curveS augMenteD BY MoneY Market intereSt rateS the caSe of JaPan by Teppei Nagano and Naohiko Baba In 2008 all ECB publications feature a motif taken from the 10 banknote. WORKING PAPER SERIES NO 9 8 0 / DECEMBER 20 08 ECB WORKSHOP ON THE ANALYSIS OF THE MONEY MARKET EXTRACTING MARKET EXPECTATIONS FROM YIELD CURVES AUGMENTED BY MONEY MARKET INTEREST RATES THE CASE OF JAPAN 1 by Teppei Nagano 2 and Naohiko Baba 3 This paper can be downloaded without charge from [http://www.ecb.europa. eu](http://www.ecb.europa. eu) or from the Social Science Research Network electronic library at [http://ssrn.com/abstract_id=1310617](http://ssrn.com/abstract_id=1310617). 1 The authors are grateful to workshop participants at the ECB and Hitotsubashi University, particularly to Jagjit Chadha (discussant), Makoto Saito, Ken Singleton, Christian Upper, and Kenji Wada for useful comments and discussions. We also benefited from discussions with market participants in London and Tokyo. The views expressed in this paper are solely those of the authors and do not necessarily reflect those of the Bank of Japan, the Bank for International Settlements and the European Central Bank. 2 Bank of Japan, 2-1-1 Nihonbashi-Hongokucho Chuo-ku, Tokyo 103-8660, Japan; [e-mail: teppei.nagano@boj.or.jp](e-mail: teppei.nagano@boj.or.jp) [3 Corresponding author: Bank for International Settlements](3 Corresponding author: Bank for International Settlements), Centralbahnplatz 2, Basel CH-4002, Switzerland; Tel: +41 61 280 8819; fax: +41 61 280 9100; [e-mail: naohiko.baba@bis.org](e-mail: naohiko.baba@bis.org) ECB WORKSHOP ON THE ANALYSIS OF THE MONEY MARKET On 14 and 15 November 2007, Alain Durré, Huw Pill and Diego Rodriguez-Palenzuela of the ECB’s Monetary Policy Stance Division organised a central bank workshop titled “The Analysis of the Money Market: Role, Challenges and Implications from the Monetary Policy Perspective”. This workshop provided an opportunity for participating central bank experts to exchange views and foster debate, also in interaction with international organizations and academic institutions. The first day of the workshop addressed issues related to the macro-perspective of the money market, drawing on the experiences of a large number of countries. The second day adopted a micro-perspective on the money market, looking in particular at trading behaviour in the overnight money market and its implications for the evolution of spreads. A first version of this paper was presented at this workshop. The papers presented at the time of the workshop did not consider the potential implications of the financial turmoil for the results of the paper, given that the tensions in money markets emerged in August 2007. The published version of these papers represents an update of the original paper, which incorporates the discussion which took place at the workshop and in most cases a discussion on the developments in the money markets since August 2007. © European Central Bank, 2008 Address Kaiserstrasse 29 60311 Frankfurt am Main, Germany Postal address Postfach 16 03 19 60066 Frankfurt am Main, Germany Telephone +49 69 1344 0 Website [http://www.ecb.europa.eu](http://www.ecb.europa.eu) Fax +49 69 1344 6000 All rights reserved. Any reproduction, publication andreprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the ECB or the author(s). The views expressed in this paper do not necessarily reﬂect those of the European Central Bank. The statement of purpose for the ECB Working Paper Series is available from the ECB website, [http://www.ecb.europa](http://www.ecb.europa). eu/pub/scientific/wps/date/html/index . en.html ISSN 1561-0810 (print) ISSN 1725-2806 (online) CONTENTS Abst

FAQs

What period and macro questions does the paper focus on?

The paper analyzes market expectations about the Japanese economy and the BOJ’s policy stance from end-March 2006 onward, after quantitative easing ends. It targets expectations embedded in augmented yen yield curves.

Which data and yield-curve augmentations are used?

It uses swap yield curves augmented by OIS interest rates (OIS/Swap) and the JGB yield curve augmented by FB/TB interest rates (FB/TB/JGB). These augmentations incorporate money market interest rate information.

How does the paper identify and interpret market expectations?

It applies the Nelson-Siegel model to estimate three latent dynamic factors interpreted as market expectations. It further evaluates how price discovery differs across factors and decomposes each factor into efficient price and idiosyncratic components using a structural time-series model.

Oct 23, 2026

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