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On forecasting interest rates : An efficient markets perspective

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  • Pesando, James E.

Abstract

This paper reviews, from an applied forecasting perspective, the properties of short- and long-term interest rates in an efficient market. The paper emphasizes that efficient markets do not preclude economic agents from successfully forecasting movements in short-term interest rates. For brief forecast intervals, however, ex ante changes in long-term rates are sufficiently close to zero that economic agents are not likely to improve upon the no-change prediction of the martingale model. Economic agents, in effect, are not likely to succeed in forecasting short-term movements in long-term interest rates. An analysis of three sets of Canadian interest rate forecasts provides results which are consistent with the theoretical discussion, Further, these results parallel those obtained in recent studies of recorded forecasts in the United States, although the authors of these latter studies apparently failed to appreciate the nature of their findings.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 8 (1981)
Issue (Month): 3 ()
Pages: 305-318

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Handle: RePEc:eee:moneco:v:8:y:1981:i:3:p:305-318

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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  1. Modigliani, Franco & Shiller, Robert J, 1973. "Inflation, Rational Expectations and the Term Structure of Interest Rates," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 40(157), pages 12-43, February.
  2. Frederic S. Mishkin, 1978. "Efficient-Markets Theory: Implications for Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 707-752.
  3. McCulloch, J Huston, 1975. "An Estimate of the Liquidity Premium," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(1), pages 95-119, February.
  4. Pesando, James E, 1978. "On the Efficiency of the Bond Market: Some Canadian Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(6), pages 1057-76, December.
  5. Franco Modigliani & Richard Sutch, 1967. "Debt Management and the Term Structure of Interest Rates: An Empirical Analysis of Recent Experience," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 75, pages 569.
  6. Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(2), pages 207-37, April.
  7. Brunner, Karl & Meltzer, Allan H., 1976. "The Phillips curve," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 1-18, January.
  8. Masson, Paul R, 1978. "Structural Models of the Demand for Bonds and the Term Structure of Interest Rates," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 45(180), pages 363-77, November.
  9. McCallum, John S, 1975. "The Expected Holding Period Return, Uncertainty and the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 30(2), pages 307-23, May.
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Cited by:
  1. Obermaier, Robert, 2005. "Unternehmensbewertung, Basiszinssatz und Zinsstruktur: Kapitalmarktorientierte Bestimmung des risikolosen Basiszinssatzes bei nicht-flacher Zinsstruktur," University of Regensburg Working Papers in Business, Economics and Management Information Systems 408, University of Regensburg, Department of Economics.
  2. Chiang, Thomas C. & Chiang, Jeanette Jin, 1995. "Emperical analysis of short-term eurocurrency rates: Evidence from a transfer function error correction model," Journal of Economics and Business, Elsevier, vol. 47(4), pages 335-351, October.
  3. Baghestani, Hamid, 2009. "Forecasting in efficient bond markets: Do experts know better?," International Review of Economics & Finance, Elsevier, vol. 18(4), pages 624-630, October.
  4. Angelo Melino, 1986. "The Term Structure of Interest Rates: Evidence and Theory," NBER Working Papers 1828, National Bureau of Economic Research, Inc.
  5. Pami Dua, 2008. "Interest Rate Modeling and Forecasting in India," Working Papers id:1521, eSocialSciences.
  6. Chortareas, Georgios & Jitmaneeroj, Boonlert & Wood, Andrew, 2012. "Forecast rationality and monetary policy frameworks: Evidence from UK interest rate forecasts," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 209-231.
  7. Yvon Fauvel & Alain Paquet & Christian Zimmermann, 1999. "A Survey on Interest Rate Forecasting," Cahiers de recherche CREFE / CREFE Working Papers, CREFE, Université du Québec à Montréal 87, CREFE, Université du Québec à Montréal.
  8. Ahrens, Ralf, 1999. "Improving market-based forecasts of short-term interest rates: Time-varying stationarity and the predictive content of switching regime-expectations," CFS Working Paper Series 1999/14, Center for Financial Studies (CFS).

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