01940cam a22002897 4500001000600000003000500006005001700011006001900028007001500047008004100062100002000103245012500123260006600248300005700314490004100371500001900412520081400431530006001245538007201305538003601377588002501413700002101438710004201459830007601501856003701577856003601614w6324NBER20200604043545.0m o d cr cnu||||||||200604s1997 mau fo 000 0 eng d1 aHong, Harrison.12aA Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets /cHarrison Hong, Jeremy C. Stein. aCambridge, Mass.bNational Bureau of Economic Researchc1997. a1 online resource:billustrations (black and white);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.0 aPrint version record1 aStein, Jeremy C.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w6324.40uhttp://www.nber.org/papers/w632440uhttp://dx.doi.org/10.3386/w6324