Forward rates in the term structure of interest contain predictions of future spot rates plus (possibly) term premia. Realized spot rates contain predicted spot rates plus forecast errors. Under rational expectations forecast errors are not predictable. By forecasting spot rates using publicly available information, bounds on the variation of forecast errors, and term premia are obtained. For one-month treasury bill rates, one to two thirds of the variation in the difference between forward rates and realized spot rates is due to variation in term premia.

We examine a variety of models in which the variance of a portfolio's excess return depends on a state variable generated by a first-order Markov process. A model in which the state is known to economic agents is estimated. It suggests that the mean excess return moves inversely with the level of risk. We then estimate a model in which agents are uncertain of the state. The estimates indicate that agents are consistently surprised by high-variance periods, so there is a negative correlation between movements in volatility and in excess returns.