The Behavior of Interest Rates

Posted: 29 Feb 2008

See all articles by Eugene F. Fama

Eugene F. Fama

University of Chicago - Finance

Multiple version iconThere are 2 versions of this paper

Date Written: 2006

Abstract

The evidence in Fama and Bliss (1987) that forward interest rates forecast future spot interest rates for horizons beyond a year repeats in the out-of-sample 1986-2004 period. But the inference that this forecast power is due to mean reversion of the spot rate toward a constant expected value no longer seems valid. Instead, the predictability of the spot rate captured by forward rates seems to be due to mean reversion toward a time-varying expected value that is subject to a sequence of apparently permanent shocks that are on balance positive to mid-1981 and on balance negative thereafter.

Suggested Citation

Fama, Eugene F., The Behavior of Interest Rates ( 2006). The Review of Financial Studies, Vol. 19, Issue 2, pp. 359-379, 2006, Available at SSRN: https://ssrn.com/abstract=900724 or http://dx.doi.org/10.1093/rfs/hhj019

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University of Chicago - Finance ( email )

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