NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Simple Account of the Behavior of Long-Term Interest Rates

John Y. Campbell, Robert J. Shiller

NBER Working Paper No. 1203
Issued in September 1983
NBER Program(s):   ME

Recent empirical research on the term structure of interest rates has shown that the long-term interest rate is well described by adistributed lag on short-term interest rates, but does not conform to the expectations theory of the term structure. It has been suggested that the long rate "overreacts" to the short rate. This paper presents aunified taxonomy of risk premia, or deviations from the expectations theory. This enables the hypothesis of overreaction to be formally stated. It is shown that, if anything, the long rate has underreacted to the short rate. However, the independent movement of the long rate is primarily responsible for the failure of the expectations theory.

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Document Object Identifier (DOI): 10.3386/w1203

Published: Campbell, John Y. and Robert J. Shiller. "A Simple Account of the Behaviorof Long-Term Interest Rates." American Economic Review, Vol. 74, No. 2, ( May 1984), pp. 44-48. citation courtesy of

 
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