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Predictable Changes in Yields and Forward Rates

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  • David Backus
  • Silverio Foresi
  • Abon Mozumdar
  • Liuren Wu

Abstract

We consider the patterns in the predictability of interest rates expectations hypothesis (EH), and attempt to account for them with affine models. We make the following points: (i) Discrepancies in the data from the EH take a particularly simple form with forward rates: as theory suggests, the largest discrepancies are at short maturities. (ii) Reasonable estimates of one-factor Cox-Ingersoll-Ross models imply regressions on the opposite side of the EH than we see in the data: regression slopes are greater than one (iii) Multifactore affine models can nevertheless approximate both departures from the EH and other properties of interest rates.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6379.

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Date of creation: Jan 1998
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Publication status: published as Journal of Financial Economics, Volume: 59 Issue: 3 (March 2001) Pages: 281-311
Handle: RePEc:nbr:nberwo:6379

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