Review of Financial Studies Vol. 19 No. 2 2006
The Behavior of Interest Rates
Abstract
The evidence in Fama and Bliss (1987) that forward interest rates forecast future spot interest rates for horizons beyond a year repeats in the out-of-sample 1986-2004 period. But the inference that this forecast power is due to mean reversion of the spot rate toward a constant expected value no longer seems valid. Instead, the predictability of the spot rate captured by forward rates seems to be due to mean reversion toward a time-varying expected value that is subject to a sequence of apparently permanent shocks that are on balance positive to mid-1981 and on balance negative thereafter.
- Volume
- 19
- Issue
- 2
- Pages
- 359-379
- Sources
- bibtex:phds-export.bib