Endogenous Term Premia and Anomalies in the Term Structure of Interest Rates: Explaining the Predictability Smile

WP 96-11

Posted: 5 Feb 1997

See all articles by William Roberds

William Roberds

Federal Reserve Bank of Atlanta

Charles H. Whiteman

Pennsylvania State University - Smeal College of Business

Date Written: October 1996

Abstract

Recent studies have documented the existence of a "predictability smile" in the term structure of interest rates: spreads between long maturity rates and short rates predict subsequent movements in interest rates provided the long horizon is three months or less or if the long horizon is two years or more, but not for intermediate maturities. Accounts for portions of the smile involve interest rate smoothing by the Fed, time-varying risk premia, "Peso problems," and measurement error. We take a more nearly general equilibrium approach to explaining this phenomenon and show that despite its highly restrictive nature, the Cox-Ingersoll-Ross (1985) model of the term structure can account for the predictability smile.

JEL Classification: E43, G12

Suggested Citation

Roberds, William and Whiteman, Charles H., Endogenous Term Premia and Anomalies in the Term Structure of Interest Rates: Explaining the Predictability Smile (October 1996). WP 96-11, Available at SSRN: https://ssrn.com/abstract=8085

William Roberds (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8970 (Phone)
404-498-8956 (Fax)

Charles H. Whiteman

Pennsylvania State University - Smeal College of Business

University Park, PA 16802
United States
814-863-0448 (Phone)

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