01800cam a22002417 4500001000600000003000500006005001700011008004100028100002000069245014800089260006600237490004100303500001900344520081400363530006101177538007201238538003601310700002101346710004201367830007601409856003701485856003601522w6324NBER20170722073110.0170722s1997 mau||||fs|||| 000 0 eng d1 aHong, Harrison.12aA Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Marketsh[electronic resource] /cHarrison Hong, Jeremy C. Stein. aCambridge, Mass.bNational Bureau of Economic Researchc1997.1 aNBER working paper seriesvno. w6324 aDecember 1997.3 aWe 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. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web.1 aStein, Jeremy C.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w6324.4 uhttp://www.nber.org/papers/w632441uhttp://dx.doi.org/10.3386/w6324