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The Behavior of Interest Rates

Eugene F. Fama

University of Chicago - Finance

May 2004

CRSP Working Paper No. 553

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 raets 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.

Number of Pages in PDF File: 30

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Date posted: May 25, 2004  

Suggested Citation

Fama, Eugene F., The Behavior of Interest Rates (May 2004). CRSP Working Paper No. 553. Available at SSRN: https://ssrn.com/abstract=515924 or http://dx.doi.org/10.2139/ssrn.515924

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Eugene F. Fama (Contact Author)
University of Chicago - Finance ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7282 (Phone)
773-702-9937 (Fax)

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