The Behavior of Interest Rates
Review of Financial Studies
2006
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. Copyright 2006, Oxford University Press.
- DOI
- 10.1093/rfs/hhj019
- Volume
- 19 (2)
- Pages
- 359-379
- Language
- en
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