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Forecasting With Uncertain Persistence

Author

Listed:
  • Joel P. Flynn

    (Yale University)

  • Maksim Meinert

    (Yale University)

  • Karthik A. Sastry

    (Princeton University)

Abstract

With uncertainty about persistence, we show that forecasts necessarily become more persistent and over-react at long horizons. For these reasons, correctly specified and Bayesian forecasts may under-react at short horizons and over-react at long horizons. These results provide a unified explanation for several asset pricing and forecasting puzzles, including: (i) the excess responsiveness of long-horizon rates to short rates, (ii) the dominance of apparent term premia for long-term rates, (iii) the ex post predictability of bond yields, (iv) the excess volatility of long-horizon forward prices, (v) the excess persistence of long-horizon forecasts, and (vi) the over-reaction of long-horizon forecasts.

Suggested Citation

  • Joel P. Flynn & Maksim Meinert & Karthik A. Sastry, 2026. "Forecasting With Uncertain Persistence," Cowles Foundation Discussion Papers 2544, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:2544
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    File URL: https://cowles.yale.edu/sites/default/files/2026-07/d2544.pdf
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    References listed on IDEAS

    as
    1. Hanson, Samuel G. & Stein, Jeremy C., 2015. "Monetary policy and long-term real rates," Journal of Financial Economics, Elsevier, vol. 115(3), pages 429-448.
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    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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