TY - JOUR
AU - Pesando,James E.
TI - On Expectations, Term Premiums and the Volatility of Long-Term Interest Rates
JF - National Bureau of Economic Research Working Paper Series
VL - No. 595
PY - 1980
Y2 - December 1980
DO - 10.3386/w0595
UR - http://www.nber.org/papers/w0595
L1 - http://www.nber.org/papers/w0595.pdf
N1 - Author contact info:
James Pesando
Institute for Policy Analysis
University of Toronto
140 St. George Street
Toronto, Ont M5S 1A1 CANADA
E-Mail: pesando@chass.utoronto.ca
AB - The paper first identifies how large must be the range in which ex ante yields on long-relative to short-term bonds vary if term premiums -- are to account for a significant fraction of the variance of the holding- period yields on long-term bonds. This paper then extends Shiller's bound to the case of a time-varying term premium and readily identifies the variance in the term premium necessary to salvage the efficient markets model if the variance of these holding-period yields exceeds the bound implied by the rational expectations model. The role of transactions costs is noted and the possibility explored that evidence of excess volatility need not imply the existence of unexploited profit opportunities under the rational expectations model.
ER -