Long Forward and Zero-Coupon Rates Can Never Fall

Posted: 22 Aug 1998

See all articles by Philip H. Dybvig

Philip H. Dybvig

Washington University in St. Louis - John M. Olin Business School

Jonathan E. Ingersoll

Yale School of Management - International Center for Finance

Stephen A. Ross

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Yale University - International Center for Finance

Abstract

In frictionless markets having no arbitrage, the asymptotic zero-coupon rate never falls. The same is true of the long forward rate. The long par-coupon rate can rise and fall due to forward rate movements at short maturities. This paper relates the three types of interest rate and formalizes and proves the impossibility results for falling asymptotic rates. These results can be tested in a parametric term structure specification that is rich enough to identify a time series of long rates. The results show that it is not possible to specify arbitrarily the long forward or zero-coupon rate process.

JEL Classification: G24

Suggested Citation

Dybvig, Philip H. and Ingersoll, Jonathan E. and Ross, Stephen A., Long Forward and Zero-Coupon Rates Can Never Fall. Journal of Business, Vol. 59, Issue 1, January 1996, Available at SSRN: https://ssrn.com/abstract=6765

Philip H. Dybvig

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Jonathan E. Ingersoll (Contact Author)

Yale School of Management - International Center for Finance ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-5924 (Phone)
203-432-6974 (Fax)

Stephen A. Ross

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
203-432-6015 (Phone)
203-432-8931 (Fax)

Yale University - International Center for Finance

Box 208200
New Haven, CT 06520-8200
United States

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