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Predictable changes in yields and forward rates

Listed author(s):
  • Backus, David
  • Foresi, Silverio
  • Mozumdar, Abon
  • Wu, Liuren

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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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 59 (2001)
Issue (Month): 3 (March)
Pages: 281-311

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Handle: RePEc:eee:jfinec:v:59:y:2001:i:3:p:281-311
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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