On Forecasting Interest Rates: An Efficient Markets Perspective

28 Pages Posted: 19 Jun 2004 Last revised: 17 Aug 2022

See all articles by James E. Pesando

James E. Pesando

University of Toronto; National Bureau of Economic Research (NBER)

Date Written: November 1979


This paper reviews, from an applied forecasting perspective, the properties of short- and long-term interest rates in an efficient market. The paper emphasizes that efficient markets do not preclude economic agents from successfully forecasting movements in short-term interest rates. For brief forecast intervals, however, ex ante changes in long-term rates are sufficiently close to zero that economic agents are not likely to improve upon the no-change prediction of the martingale model. Economic agents, in effect, are not likely to succeed in forecasting short-term movements in long-term interest rates. An analysis of three sets of Canadian interest rate forecasts provides results which are consistent with the theoretical discussion, Further, these results parallel those obtained in recent studies of recorded forecasts in the United States, although the authors of these latter studies apparently failed to appreciate the nature of their findings.

Suggested Citation

Pesando, James E., On Forecasting Interest Rates: An Efficient Markets Perspective (November 1979). NBER Working Paper No. w0410, Available at SSRN: https://ssrn.com/abstract=262039

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