Advanced Search
MyIDEAS: Login to save this article or follow this journal

Financial factors, macroeconomic information and the Expectations Theory of the term structure of interest rates

Contents:

Author Info

  • Carriero, Andrea
  • Favero, Carlo A.
  • Kaminska, Iryna

Abstract

In this Paper we concentrate on the hypothesis that the empirical rejections of the Expectations Theory (ET) of the term structure of interest rates can be caused by improper modeling of expectations. Our starting point is an interesting anomaly found by Campbell-Shiller (1987), when by taking a VAR approach they abandon limited information approach to test the ET, in which realized returns are taken as a proxy for expected returns. We use financial factors and macroeconomic information to construct a test of the theory based on simulating investors’ effort to use the model in ‘real time’ to forecast future monetary policy rates. Our findings suggest that the importance of fluctuations of risk premia in explaining the deviation from the ET is reduced when some forecasting model for short-term rates is adopted and a proper evaluation of uncertainty associated to policy rates forecast is considered.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6VC0-4FSFXJY-1/2/e15ae4123fb7038717e8d34d7301af85
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 131 (2006)
Issue (Month): 1-2 ()
Pages: 339-358

as in new window
Handle: RePEc:eee:econom:v:131:y:2006:i:1-2:p:339-358

Contact details of provider:
Web page: http://www.elsevier.com/locate/jeconom

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Kozicki, Sharon & Tinsley, P. A., 2001. "Shifting endpoints in the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 613-652, June.
  2. Bennett T. McCallum, 1994. "Monetary Policy and the Term Structure of Interest Rates," NBER Working Papers 4938, National Bureau of Economic Research, Inc.
  3. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
  4. Francis X. Diebold & Canlin Li, 2003. "Forecasting the Term Structure of Government Bond Yields," NBER Working Papers 10048, National Bureau of Economic Research, Inc.
  5. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
  6. Geert Bekaert & Robert J. Hodrick, 2000. "Expectations Hypotheses Tests," NBER Working Papers 7609, National Bureau of Economic Research, Inc.
  7. Hördahl, Peter & Tristani, Oreste & Vestin, David, 2004. "A joint econometric model of macroeconomic and term structure dynamics," Working Paper Series 0405, European Central Bank.
  8. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers 785, Cowles Foundation for Research in Economics, Yale University.
  9. Andrew Ang & Monika Piazzesi & Min Wei, 2004. "What Does the Yield Curve Tell us about GDP Growth?," NBER Working Papers 10672, National Bureau of Economic Research, Inc.
  10. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  11. Edwin J. Elton, 1999. "Presidential Address: Expected Return, Realized Return, and Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 54(4), pages 1199-1220, 08.
  12. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  13. Favero, Carlo A., 2006. "Taylor rules and the term structure," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1377-1393, October.
  14. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," NBER Working Papers 5031, National Bureau of Economic Research, Inc.
  15. Andrew Ang & Monika Piazzesi, 2001. "A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables," NBER Working Papers 8363, National Bureau of Economic Research, Inc.
  16. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April.
  17. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
  18. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 869-902, August.
  19. Balduzzi, Pierluigi & Bertola, Giuseppe & Foresi, Silverio, 1997. "A model of target changes and the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 223-249, July.
  20. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, vol. 77(4), pages 680-92, September.
  21. William Roberds & Charles H. Whiteman, 1996. "Endogenous term premia and anomalies in the term structure of interest rates: explaining the predictability smile," Working Paper 96-11, Federal Reserve Bank of Atlanta.
  22. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April.
  23. Robert J. Shiller, 1980. "Alternative Tests of Rational Expectations Models: The Case of the Term Structure," NBER Working Papers 0563, National Bureau of Economic Research, Inc.
  24. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Cowles Foundation Discussion Papers 667, Cowles Foundation for Research in Economics, Yale University.
  25. Glenn D. Rudebusch, 2001. "Term structure evidence on interest rate smoothing and monetary policy inertia," Working Paper Series 2001-02, Federal Reserve Bank of San Francisco.
  26. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02.
  27. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  28. Mankiw, N Gregory & Miron, Jeffrey A, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 211-28, May.
  29. Fuhrer, Jeffrey C, 1996. "Monetary Policy Shifts and Long-Term Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1183-1209, November.
  30. Peter Hordahl & Oreste Tristani & David Vestin, 2003. "A joint econometric model of macroeconomic and term structure," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:econom:v:131:y:2006:i:1-2:p:339-358. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.