Expectation Puzzles, Time-varying Risk Premia, and Dynamic Models of the Term Structure

Qiang Dai, Kenneth J. Singleton

NBER Working Paper No. 8167
Issued in March 2001
NBER Program(s):Asset Pricing

Though linear projections of returns on the slope of the yield curve have contradicted the implications of the traditional expectations theory,' we show that these findings are not puzzling relative to a large class of richer dynamic term structure models. Specifically, we are able to match all of the key empirical findings reported by Fama and Bliss and Campbell and Shiller, among others, within large subclasses of affine and quadratic-Gaussian term structure models. Additionally, we show that certain risk-premium adjusted' projections of changes in yields on the slope of the yield curve recover the coefficients of unity predicted by the models. Key to this matching are parameterizations of the market prices of risk that let the risk factors affect the market prices of risk directly, and not only through the factor volatilities. The risk premiums have a simple form consistent with Fama's findings on the predictability of forward rates, and are shown to also be consistent with interest rate, feedback rules used by a monetary authority in setting monetary policy.

download in pdf format
   (472 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w8167

Published: Dai, Qiang and Kenneth J. Singleton. "Expectation Puzzles, Time-Varying Risk Premia, And Affine Models Of The Term Structure," Journal of Financial Economics, 2002, v63(3,Mar), 415-441.

Users who downloaded this paper also downloaded* these:
Dai and Singleton w6128 Specification Analysis of Affine Term Structure Models
Campbell and Shiller w3153 Yield Spreads and Interest Rate Movements: A Bird's Eye View
Jagannathan, Kaplin, and Sun w8682 An Evaluation of Multi-Factor CIR Models Using LIBOR, Swap Rates, and Cap and Swaption Prices
Cochrane and Piazzesi w9178 Bond Risk Premia
Ang, Bekaert, and Wei w12930 The Term Structure of Real Rates and Expected Inflation
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us