On Expectations, Term Premiums and the Volatility of Long-Term Interest Rates
The paper first identifies how large must be the range in which ex ante yields on long-relative to short-term bonds vary if term premiums -- are to account for a significant fraction of the variance of the holding- period yields on long-term bonds. This paper then extends Shiller's bound to the case of a time-varying term premium and readily identifies the variance in the term premium necessary to salvage the efficient markets model if the variance of these holding-period yields exceeds the bound implied by the rational expectations model. The role of transactions costs is noted and the possibility explored that evidence of excess volatility need not imply the existence of unexploited profit opportunities under the rational expectations model.
|Date of creation:||Dec 1980|
|Date of revision:|
|Publication status:||published as Pesando, James E. "On Expectations, Term Premiums and the Volatility of Long-Term Interest Rates." Journal of Monetary Economics, Vol. 12, No. 3, (September 1983), pp. 467-74.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
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- 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.
- Singleton, Kenneth J, 1980. "Expectations Models of the Term Structure and Implied Variance Bounds," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1159-76, December.
- 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.
- 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.
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