The Behavior of Interest Rates

30 Pages Posted: 25 May 2004  

Eugene F. Fama

University of Chicago - Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 2004

Abstract

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.

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

Eugene F. Fama (Contact Author)

University of Chicago - Finance ( email )

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