Are Forward Premia Mean Reverting?

Posted: 13 Jun 2001

See all articles by Walid Hejazi

Walid Hejazi

University of Toronto - Rotman School of Management

Zhixin Li

University of Toronto - Department of Economics

Abstract

The return regression methodology is used to test for mean reversion in the forward market for US T-bills over the period 1964 to 1995. Substantial evidence of mean reversion is found in one- to ten-month forward spreads over the 12 to 24 month horizon. Such evidence is indicative of market inefficiency or speculative dynamics in models with time-invariant term premia. This is not necessarily the case, however, in models with time-varying term premia. We show that forward premia estimated using a multi-factor GARCH model accounts for this evidence, thus reconciling the evidence of mean reversion with market efficiency.

Keywords: Time-varying term premia, mean reversion, GARCH-M

JEL Classification: G10, E43

Suggested Citation

Hejazi, Walid and Li, Zhixin, Are Forward Premia Mean Reverting?. Applied Finacial Economics, Vol. 10, pp. 343-350, 2000. Available at SSRN: https://ssrn.com/abstract=241232

Walid Hejazi (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
(416) 287-7318 (Phone)

Zhixin Li

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada

Register to save articles to
your library

Register

Paper statistics

Abstract Views
747
PlumX Metrics