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A Modern Look At Asset Pricing and Short-Term Interest Rates

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  • Martin D. Evans
  • Paul Wachtel

Abstract

This paper uses modern asset pricing theory to examine the behavior of short-term nominal interest rates over the past 25 years. The analysis investigates whether variation in the stochastic behavior of output and inflation can explain movements in the rate of interest. Our results reveal that much of the month to month movement in nominal interest rates reflects changes in the real rate and the risk premia rather than inflationary expectations.

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File URL: http://www.nber.org/papers/w3245.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3245.

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Date of creation: Jan 1990
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Publication status: published as Evans, Martin and Paul Wachtel. "Interpreting The Movements In Short-Term Interest Rates," Journal of Business, 1992, v65(3), 395-430.
Handle: RePEc:nbr:nberwo:3245

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  1. Robert B. Barsky, 1986. "The Fisher Hypothesis and the Forecastability and Persistence of Inflation," NBER Working Papers 1927, National Bureau of Economic Research, Inc.
  2. Grossman, Sanford J. & Shiller, Robert J., 1982. "Consumption correlatedness and risk measurement in economies with non-traded assets and heterogeneous information," Journal of Financial Economics, Elsevier, Elsevier, vol. 10(2), pages 195-210, July.
  3. Newey, Whitney K, 1985. "Maximum Likelihood Specification Testing and Conditional Moment Tests," Econometrica, Econometric Society, Econometric Society, vol. 53(5), pages 1047-70, September.
  4. Garbade, Kenneth & Wachtel, Paul, 1978. "Time variation in the relationship between inflation and interest rates," Journal of Monetary Economics, Elsevier, Elsevier, vol. 4(4), pages 755-765, November.
  5. Fama, Eugene F, 1976. "Inflation Uncertainty and Expected Returns on Treasury Bills," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(3), pages 427-48, June.
  6. Amihud, Y. & Barnea, A., 1977. "A Note on Fisher Hypothesis and Price Level Uncertainty," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 12(03), pages 525-530, September.
  7. Figlewski, Stephen & Wachtel, Paul, 1981. "The Formation of Inflationary Expectations," The Review of Economics and Statistics, MIT Press, vol. 63(1), pages 1-10, February.
  8. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, American Economic Association, vol. 65(5), pages 900-922, December.
  9. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(2), pages 249-65, April.
  10. Antoncic, Madelyn, 1986. "High and Volatile Real Interest Rates: Where Does the Fed Fit In?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 18(1), pages 18-27, February.
  11. Benninga, Simon & Protopapadakis, Aris, 1983. "Real and Nominal Interest Rates under Uncertainty: The Fisher Theorem and the Term Structure," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(5), pages 856-67, October.
  12. Shome, Dilip K & Smith, Stephen D & Pinkerton, John M, 1988. " The Purchasing Power of Money and Nominal Interest Rates: A Re-examination," Journal of Finance, American Finance Association, American Finance Association, vol. 43(5), pages 1113-25, December.
  13. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1429-45, November.
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Cited by:
  1. Tim BOLLERSLEV & Ray Y. CHOU & Narayanan JAYARAMAN & Kenneth F. KRONER, 1991. "Les modéles ARCH en finance : un point sur la théorie et les résultats empiriques," Annales d'Economie et de Statistique, ENSAE, issue 24, pages 1-59.
  2. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, Elsevier, vol. 52(1-2), pages 5-59.

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