Measuring Variability and Stationarity of Term Premia for Interest Rate Forecasting

Advances in Quantitative Analysis of Finance and Accounting, Vol. 3A, 1995

Posted: 22 Apr 2003

See all articles by Ramon P. DeGennaro

Ramon P. DeGennaro

University of Tennessee, Knoxville - Department of Finance

James T. Moser

American University - Kogod School of Business

Abstract

We study a series of weekly term premia extracted from U.S. Treasury bill quotations from 1970-1982. We choose this period because it is characterized by high and variable inflation. We find that spot and forward rates are cointegrated and that the series of their differences is stationary. This implies that term premia are also stationary, which has implications for researchers seeking to improve interest rate forecasting. It also rules out several variables as determinants of term premia. We use a variance estimator that is consistent against autoregression to compute variance bounds. This lets us use overlapping observations, thus conserving degrees of freedom and letting us use a finer sampling interval. This estimator shows that both forecast errors and term premia are more variable than reported previously. Those earlier results used periods of low inflation, though, so our results are not necessarily inconsistent with them. Variation in the premium rises with the level.

JEL Classification: E4, G1

Suggested Citation

DeGennaro, Ramon P. and Moser, James T., Measuring Variability and Stationarity of Term Premia for Interest Rate Forecasting. Advances in Quantitative Analysis of Finance and Accounting, Vol. 3A, 1995. Available at SSRN: https://ssrn.com/abstract=384481

Ramon P. DeGennaro (Contact Author)

University of Tennessee, Knoxville - Department of Finance ( email )

423 Stokely Management Center
Knoxville, TN 37996
United States
865-974-1726 (Phone)
865-974-1716 (Fax)

James T. Moser

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States

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