@techreport{NBERw6324,
title = "A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets",
author = "Harrison Hong and Jeremy C. Stein",
institution = "National Bureau of Economic Research",
type = "Working Paper",
series = "Working Paper Series",
number = "6324",
year = "1997",
month = "December",
doi = {10.3386/w6324},
URL = "http://www.nber.org/papers/w6324",
abstract = {We assume that the instantaneous riskless rate reverts towards a central tendency which in turn, is changing stochastically over time. As a result, current short-term rates are not" sufficient to predict future short-term rates movements, as would be the case if the central" tendency was constant. However, since longer-maturity bond prices incorporate information" about the central tendency, longer-maturity bond yields can be used to predict future short-term" rate movements. We develop a two-factor model of the term-structure which implies that a" linear combination of any two rates can be used as a proxy for the central tendency. Based on" this central-tendency proxy, we estimate a model of the one-month rate which performs better" than models which assume the central tendency to be constant.},
}