Journal of Finance Vol. 52 No. 4 1997
The Relation Between Default-Free Interest Rates and Expected Economic Growth Is Stronger Than You Think.
Abstract
The relation between default-free interest rates and expected economic growth is substantially stronger than suggested by extant literature. Futures-implied Treasury bill yield spreads are more highly correlated with future real consumption, investment, and GNP growth than spot spreads. This stronger relation arises because using futures removes a component of the spot term structure that covaries negatively with real economic growth. Treasury forward rates from spot bills contain a premium for the risk that short-sellers will default. This risk premium is negatively related to expected economic growth.
- Volume
- 52
- Issue
- 4
- Pages
- 1681-94
- Sources
- bibtex:phds-export.bib