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The Predictive Power of Yield Spreads for Future Interest Rates: Evidence from the Danish Term Structure

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  • Engsted, Tom
  • Tanggaard, Carsten

Abstract

The predictive power of yield spreads for future interest rates is examined using a new database of zero-coupon bonds yields from the Danish bond market. The evidence shows that during the period of monetary targeting, 1976:1-1985:7, yield spreads have substantial predictive power and the results tend to support the rational expectations version of the classical expectations theory of the term structure. However, for the recent period 1985:8-1991:12, characterized by a shift to a policy of interest rate targeting, the predictive power of yield spreads disappears. Copyright 1995 by The editors of the Scandinavian Journal of Economics.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 97 (1995)
Issue (Month): 1 (March)
Pages: 145-59

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Handle: RePEc:bla:scandj:v:97:y:1995:i:1:p:145-59

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Web page: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-9442

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Cited by:
  1. Stefan Gerlach, 1996. "Monetary policy and the behaviour of interest rates: are long rates excessively volatile?," BIS Working Papers 34, Bank for International Settlements.
  2. Boero, G. & Torricelli, C., 1998. "Tests of the Expectations Hypothesis and Policy Reaction to the Term Spread: Some Comparative Evidence," The Warwick Economics Research Paper Series (TWERPS) 512, University of Warwick, Department of Economics.
  3. Oliver Linton & Enno Mammen & Jens Perch Nielsen & C Tanggaard, 2000. "Yield curve estimation by kernel smoothing methods," LSE Research Online Documents on Economics 2270, London School of Economics and Political Science, LSE Library.
  4. Christian Mose Nielsen, 2007. "Does the choice of interest rate data matter for the results of tests of the expectations hypothesis - some results for the UK," Money Macro and Finance (MMF) Research Group Conference 2006 132, Money Macro and Finance Research Group.
  5. Engsted, Tom, 1996. "The predictive power of the money market term structure," International Journal of Forecasting, Elsevier, vol. 12(2), pages 289-295, June.
  6. Alain Durré, 2006. "The Liquidity Premium in the Money Market: A Comparison of the German Mark Period and the Euro Area," German Economic Review, Verein für Socialpolitik, vol. 7, pages 163-187, 05.
  7. Peter Reinhard Hansen, 2000. "Structural Changes in the Cointegrated Vector Autoregressive Model," Working Papers 2000-20, Brown University, Department of Economics.
  8. Cuthbertson, Keith & Nitzsche, Dirk, 2003. "Long rates, risk premia and the over-reaction hypothesis," Economic Modelling, Elsevier, vol. 20(2), pages 417-435, March.
  9. Engsted, Tom, 2002. " Measures of Fit for Rational Expectations Models," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 301-55, July.
  10. Pilegaard, Rasmus & Durré, Alain & Evjen, Snorre, 2003. "Estimating risk premia in money market rates," Working Paper Series 0221, European Central Bank.
  11. Pawel Milobedzki, 2012. "The Expectations Hypothesis of the Term Structure of LIBOR US Dollar Interest Rates," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 12, pages 5-18.
  12. Tom Engsted & Stig V. Møller & Magnus Sander, 2013. "Bond return predictability in expansions and recessions," CREATES Research Papers 2013-13, School of Economics and Management, University of Aarhus.
  13. Petko Kalev & Brett Inder, 2006. "The information content of the term structure of interest rates," Applied Economics, Taylor & Francis Journals, vol. 38(1), pages 33-45.
  14. Jorge Barros Luís & Bernardino Adão, 1997. "Testing the expectations theory for the Portuguese yield curve," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.

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