Predictable Changes in Yields and Forward Rates
David Backus, Silverio Foresi, Abon Mozumdar, Liuren Wu
NBER Working Paper No. 6379
We consider the patterns in the predictability of interest rates expectations hypothesis (EH), and attempt to account for them with affine models. We make the following points: (i) Discrepancies in the data from the EH take a particularly simple form with forward rates: as theory suggests, the largest discrepancies are at short maturities. (ii) Reasonable estimates of one-factor Cox-Ingersoll-Ross models imply regressions on the opposite side of the EH than we see in the data: regression slopes are greater than one (iii) Multifactore affine models can nevertheless approximate both departures from the EH and other properties of interest rates.
Published: Journal of Financial Economics, Volume: 59 Issue: 3 (March 2001) Pages: 281-311