The Cyclical Behavior of Interest Rates

JOURNAL OF FINANCE, September 1997

Posted: 14 Jul 1997

See all articles by Antonio Roma

Antonio Roma

Universita di Siena

Walter N. Torous

Massachusetts Institute of Technology

Abstract

This paper investigates the behavior of the term structure of interest rates over the business cycle. In contrast to prior studies that measure the business cycle by the simple growth in aggregate economic activity, we consider an alternative measure: the deviation of aggregate economic activity from its potentially stochastic trend. We show that incorporating both an independent trend and cyclical component in consumption improves the efficiency in estimating consumption-based asset pricing models. We also find that the term spread is more informative about future changes in stochastically detrended real gross domestic product (GDP) than future growth rates in real GDP.

JEL Classification: G12, E43, E44

Suggested Citation

Roma, Antonio and Torous, Walter N., The Cyclical Behavior of Interest Rates. JOURNAL OF FINANCE, September 1997, Available at SSRN: https://ssrn.com/abstract=8636

Antonio Roma

Universita di Siena ( email )

Via Banchi di Sotto, 55
I-53100 Siena
Italy

Walter N. Torous (Contact Author)

Massachusetts Institute of Technology ( email )

Center for Real Estate and Sloan School
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
961
PlumX Metrics