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Predictable changes in yields and forward rates

Authors
Journal
Journal of Financial Economics
0304-405X
Publisher
Elsevier
Publication Date
Volume
59
Issue
3
Identifiers
DOI: 10.1016/s0304-405x(00)00088-x
Keywords
  • Forecasting
  • Term Premiums
  • Expectations Hypothesis
  • Pricing Kernels
  • Affine Models
Disciplines
  • Economics

Abstract

Abstract We make two contributions to the study of interest rates. The first is to characterize their dynamics in a new way. We estimate forecasting relations based on one-period changes in forward rates, which are more easily compared than earlier work on yields to the stationary theory of bond pricing. The second is to approximate these dynamics and other salient features of interest rates with an affine model. We show that models with “negative” factors come closer to accounting for the properties of interest rates, including their dynamics, than multifactor Cox-Ingersoll-Ross models.

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