The Behavior of Interest Rates
Eugene F. Fama
University of Chicago - Booth School of Business (Finance Authors)
Review of Financial Studies, Vol. 19, No. 2, pp. 359-379, 2006
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.
Accepted Paper Series
Date posted: February 29, 2008
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