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The Behavior of Interest Rates

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  • Eugene F. Fama
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    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. Copyright 2006, Oxford University Press.

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    File URL: http://hdl.handle.net/10.1093/rfs/hhj019
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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

    Volume (Year): 19 (2006)
    Issue (Month): 2 ()
    Pages: 359-379

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    Handle: RePEc:oup:rfinst:v:19:y:2006:i:2:p:359-379

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    Cited by:
    1. Andrew Atkeson & Patrick J. Kehoe, 2008. "On the Need for a New Approach to Analyzing Monetary Policy," NBER Working Papers 14260, National Bureau of Economic Research, Inc.
    2. Wei Xiong & Hongjun Yan & Review Financial, 2007. "Heterogeneous Expectations and Bond Markets," Yale School of Management Working Papers amz2614, Yale School of Management, revised 01 Jun 2009.
    3. Jouini, Elyès & Napp, Clotilde, 2009. "Unbiased Disagreement and the Efficient Market Hypothesis," Economics Papers from University Paris Dauphine 123456789/3495, Paris Dauphine University.
    4. John Y. Campbell & Adi Sunderam & Luis M. Viceira, 2009. "Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds," NBER Working Papers 14701, National Bureau of Economic Research, Inc.
    5. repec:dgr:uvatin:2007033 is not listed on IDEAS
    6. Kerstin Bernoth & Juergen von Hagen & Casper de Vries, 2007. "The Forward Premium Puzzle: new evidence from futures contracts," DNB Working Papers 125, Netherlands Central Bank, Research Department.
    7. Jitmaneeroj, Boonlert & Wood, Andrew, 2013. "The expectations hypothesis: New hope or illusory support?," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 1084-1092.
    8. Koijen, Ralph S.J. & Hemert, Otto Van & Nieuwerburgh, Stijn Van, 2009. "Mortgage timing," Journal of Financial Economics, Elsevier, vol. 93(2), pages 292-324, August.
    9. 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.
    10. : Arie E. Gozluklu, 2012. "Inflation, Stock Market and Long-Term Investors: Real Effects of Changing Demographics," Working Papers wpn12-06, Warwick Business School, Finance Group.
    11. Bulkley, George & Harris, Richard D.F. & Nawosah, Vivekanand, 2011. "Revisiting the expectations hypothesis of the term structure of interest rates," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1202-1212, May.
    12. Kopchak, Seth J., 2013. "The realized forward term premium in the repo market," Journal of Financial Markets, Elsevier, vol. 16(2), pages 253-278.

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