Deriving a Market-based Measure of Interest Rate Expectations

Forward rates are perhaps the most common measure of expected future interest rates. But the existence of a risk premium can drive a wedge between forward rates and what the market expects future rates to be. In this article we use survey data to derive an estimate of the risk premium. We find that the survey-based risk premium implies a significant and time-varying difference between forward rates and expected future interest rates. Consequently, this article sets out a simple model of the survey-based risk premium that can be used to generate a path for expected future interest rates on any particular day.