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Long Forward and Zero-Coupon Rates Can Never Fall

Listed author(s):
  • Jonathan E. Ingersoll Jr.


    (School of Management)

  • Philip H. Dybvig


    (John M. Olin School of Business)

  • Stephen A. Ross


    (Sloan School of Management)

In frictionless markets having no arbitrage, the asymptotic zero-coupon rate never falls. The same is true of the long forward rate. The long par-coupon rate can rise and fall due to forward rate movements at short maturities. This paper relates the three types of interest rate and formalizes and proves the impossibility results for falling asymptotic rates. These results can be tested in a parametric term structure specification that is rich enough to identify a time series of long rates. The results show that it is not possible to specify arbitrarily the long forward or zero-coupon rate process.

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm45.

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Date of creation: 22 Aug 1998
Handle: RePEc:ysm:somwrk:ysm45
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