The expectations theory of the term structure implies that the spread
between a longer-term interest rate and a shorter-term interest rate
forecasts two subsequent interest rate changes: the change in yield of
the longer-term bond over the life of the shorter-term bond, and a
weighted average of the changes in shorter-tenu rates over the life of
the longer-term bond. For postwar U.S. data from Mcculloch [1987] and
just about any combination of maturities between one month and ten years
we find that the former relation is not borne out by the data, the latter
roughly is. When the yield spread is high the yield on the longer-term
bond tends to fall, contrary to the expectations theory; at the same
time, the shorter-term interest rate tends to rise, just as the
expectations theory requires. We discuss several possible
interpretations of these findings. We argue that they are consistent
with a model in which the spread is a multiple of the value implied by
the expectations theory. This model could be generated by time-varying
risk premia which are correlated with expected increases in short-term
interest rates, or by a failure of rational expectations in our sample
period.
*Published:
Review of Economic Studies, Vol. 58, pp. 495-514, (1991).
You may purchase this paper on-line in .pdf format
from SSRN.com ($5) for electronic delivery.
Machine-readable bibliographic record -
MARC,
RIS,
BibTeX
