On Expectations, Term Premiums and the Volatility of Long-Term Interest Rates
32 Pages Posted: 19 Jun 2004 Last revised: 19 Aug 2022
Date Written: December 1980
Abstract
The paper first identifies how large must be the range in which ex ante yields on long-relative to short-term bonds vary if term premiums -- are to account for a significant fraction of the variance of the holding- period yields on long-term bonds. This paper then extends Shiller's bound to the case of a time-varying term premium and readily identifies the variance in the term premium necessary to salvage the efficient markets model if the variance of these holding-period yields exceeds the bound implied by the rational expectations model. The role of transactions costs is noted and the possibility explored that evidence of excess volatility need not imply the existence of unexploited profit opportunities under the rational expectations model.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Yield Spreads and Interest Rate Movements: A Bird's Eye View
-
Parsimoneous Modeling of Yield Curves for U.S. Treasury Bills
-
Estimating and Interpreting Forward Interest Rates: Sweden 1992 - 1994
-
Estimating and Interpreting Forward Interest Rates: Sweden 1992-1994
-
The Changing Behavior of the Term Structure of Interest Rates
-
Do We Reject Too Often? Small Sample Properties of Tests of Rational Expectations Models
-
Drawing Inferences from Statistics Based on Multi-Year Asset Returns