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A Defense of Traditional Hypotheses about the Term Structure of Interest Rates

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  • Campbell, John

Abstract

Expectations theories of asset returns may be interpreted either as stating that risk premia are zero or that they are constant through time. Under the former interpretation, different versions of the expectations theory of the term structure are inconsistent with one another, but I show that this does not necessarily carry over to the constant risk premium interpretation of the theory. I present a general equilibrium example in which different types of risk premium are constant through time and dependent only on maturity. Furthermore, I argue that differences among expectations theories are second-order effects of bond yield variability. I develop an approximate linearized framework for analysis of the term structure in which these differences disappear, and I test its accuracy in practice using data from the CRSP government bond tapes.

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File URL: http://dash.harvard.edu/bitstream/handle/1/3207698/campbell_defensetraditional.pdf
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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3207698.

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Date of creation: 1986
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Publication status: Published in Journal of Finance
Handle: RePEc:hrv:faseco:3207698

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  1. Shiller, Robert & Campbell, John, 1984. "A Simple Account of the Behavior of Long-Term Interest Rates," Scholarly Articles, Harvard University Department of Economics 3208216, Harvard University Department of Economics.
  2. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1981. "A Re-examination of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, American Finance Association, vol. 36(4), pages 769-99, September.
  3. N. Gregory Mankiw & Lawrence H. Summers, 1987. "Do Long-Term Interest Rates Overreact to Short-Term Interest Rates?," NBER Working Papers, National Bureau of Economic Research, Inc 1345, National Bureau of Economic Research, Inc.
  4. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 13(4), pages 509-528, December.
  5. McCulloch, J Huston, 1971. "Measuring the Term Structure of Interest Rates," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 44(1), pages 19-31, January.
  6. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 173-224.
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