On Forecasting Interest Rates: An Efficient Markets Perspective
This paper reviews, from an applied forecasting perspective, the properties of short- and long-term interest rates in an efficient market. The paper emphasizes that efficient markets do not preclude economic agents from successfully forecasting movements in short-term interest rates. For brief forecast intervals, however, ex ante changes in long-term rates are sufficiently close to zero that economic agents are not likely to improve upon the no-change prediction of the martingale model. Economic agents, in effect, are not likely to succeed in forecasting short-term movements in long-term interest rates. An analysis of three sets of Canadian interest rate forecasts provides results which are consistent with the theoretical discussion, Further, these results parallel those obtained in recent studies of recorded forecasts in the United States, although the authors of these latter studies apparently failed to appreciate the nature of their findings.
|Date of creation:||Nov 1979|
|Publication status:||published as Pesando, James E. "On Forecasting Interest Rates: An Efficient Markets Perspective." Journal of Monetary Economics, Vol. 8, No. 3, (November 1981), pp . 305-318.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
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- Frederic S. Mishkin, 1978. "Efficient-Markets Theory: Implications for Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 707-752.
- Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 207-237, April.
- 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, vol. 75, pages 569-569.
- Masson, Paul R, 1978. "Structural Models of the Demand for Bonds and the Term Structure of Interest Rates," Economica, London School of Economics and Political Science, vol. 45(180), pages 363-377, November.
- Modigliani, Franco & Shiller, Robert J, 1973. "Inflation, Rational Expectations and the Term Structure of Interest Rates," Economica, London School of Economics and Political Science, vol. 40(157), pages 12-43, February.
- Brunner, Karl & Meltzer, Allan H., 1976. "The Phillips curve," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 1-18, January.
- McCallum, John S, 1975. "The Expected Holding Period Return, Uncertainty and the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 30(2), pages 307-323, May.
- McCulloch, J Huston, 1975. "An Estimate of the Liquidity Premium," Journal of Political Economy, University of Chicago Press, vol. 83(1), pages 95-119, February.
- Pesando, James E, 1978. "On the Efficiency of the Bond Market: Some Canadian Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1057-1076, December.
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