Financial Factors, Macroeconomic Information and the Expectations Theory of the Term Structure of Interest Rates

IGIER Working Paper No. 253

28 Pages Posted: 20 Jan 2004

See all articles by Carlo A. Favero

Carlo A. Favero

Bocconi University - Department of Economics; Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Andrea Carriero

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Iryna Kaminska

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2004

Abstract

In this paper we concentrate on the hypothesis that the empirical rejections of the Expectations Theory (ET) of the term structure of interest rates can be caused by improper modelling of expectations. Our starting point is an interesting anomaly found by Campbell-Shiller (1987), when by taking a VAR approach they abandon limited information approach to test the ET, in which realized returns are taken as a proxy for expected returns. We use financial factors and macroeconomic information to construct a test of the theory based on simulating investors' effort to use the model in "real time" to forecast future monetary policy rates. Our findings suggest that the importance of fluctuations of risk premia in explaining the deviation from the ET is reduced when some forecasting model for short-term rates is adopted and a proper evaluation of uncertainty associated to policy rates forecast is considered.

Keywords: Expectations Theory, Macroeconomic information in Finance

JEL Classification: E43, E44, E47

Suggested Citation

Favero, Carlo A. and Carriero, Andrea and Kaminska, Iryna, Financial Factors, Macroeconomic Information and the Expectations Theory of the Term Structure of Interest Rates (January 2004). IGIER Working Paper No. 253, Available at SSRN: https://ssrn.com/abstract=490542 or http://dx.doi.org/10.2139/ssrn.490542

Carlo A. Favero (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://www.igier.unibocconi.it\favero

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Andrea Carriero

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy
(39 02) 5836 3300 (Phone)
(39 02) 5836 3302 (Fax)

Iryna Kaminska

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

Via Roentgen 1
Milan, 20136
Italy

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