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Interest Rate Expectations Versus Forward Rates: Evidence From An Expectations Survey

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  • Benjamin M. Friedman
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    Abstract

    The object of this paper is to test several familiar hypotheses about the relationship between the forward rates implied by the term structure and interest rate expectations, using the one ongoing systematic survey that samples market participants' expectations. The substitution of survey data for overidentified constructions removes the principal source of ambiguity that has plagued much of the earlier empirical literature of the term structure. Nevertheless, because of limitations in the available data, it is possible to perform these tests only for the very short end of the maturity spectrum. Section I briefly describes the nature of the interest rate expectations survey and the calculation of the forward rate series from observed term structure data. Sections II-V present the results of testing the hypotheses that the implied term premium is zero on average (II), that it varies systematically with interest rate levels (III), that it varies with outside asset supplies (IV), and that it varies with economic activity (V). Section VI summarizes the findings of these tests and discusses their implications

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0295.

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    Date of creation: Oct 1978
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    Publication status: published as Friedman, Benjamin M. "Interest Rate Expectations Versus Forward Rates: Evidence from an Expectations Survey." The Journal of Finance, Vol. XXXIV, No . 4, (September 1979), pp. 965-973.
    Handle: RePEc:nbr:nberwo:0295

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    1. Hamburger, Michael J & Platt, Elliott N, 1975. "The Expectations Hypothesis and the Efficiency of the Treasury Bill Market," The Review of Economics and Statistics, MIT Press, vol. 57(2), pages 190-99, May.
    2. 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.
    3. Reuben A. Kessel, 1971. "The Cyclical Behavior of the Term Structure of Interest Rates," NBER Chapters, in: Essays on Interest Rates, Vol. 2, pages 337-390 National Bureau of Economic Research, Inc.
    4. Brunner, Karl & Meltzer, Allan H, 1972. "Money, Debt, and Economic Activity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 80(5), pages 951-77, Sept.-Oct.
    5. Stiglitz, Joseph E, 1970. "A Consumption-Oriented Theory of the Demand for Financial Assets and the Term Structure of Interest Rates," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 37(3), pages 321-51, July.
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    Cited by:
    1. Pierre-Olivier Gourinchas & Aaron Tornell, 1996. "Exchange Rate Dynamics and Learning," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1771, Harvard - Institute of Economic Research.

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