The efficiency of forward rates as forecasts of future interest rates.
Item
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Title
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The efficiency of forward rates as forecasts of future interest rates.
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Identifier
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AAI9000674
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identifier
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9000674
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Creator
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Biolsi, Robert A.
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Contributor
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Adviser: Ronald Anderson
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Date
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1989
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Language
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English
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Publisher
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City University of New York.
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Subject
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Economics, Finance
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Abstract
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The purpose of this paper is to undertake an empirical investigation of forward interest rates as forecasts of realized ex post interest rates. In particular, the attempt will be made to reconcile the Expectations Hypothesis of the Term Structure of Interest Rates with the past literature that has been highly critical of the Hypothesis based upon its seeming incompatability with the data. By using various testing methodologies, it is shown that Forward Rates can be viewed as sufficient statistics for future interest rates.;Forecast accuracy is first explored as a means of testing this efficiency. Risk premia are implicitly accounted for in this analysis. It is shown that forecast accuracy increases with the forecast horizon. This is followed by evaluating the general slope of the yield curve as a predictor of future changes in interest rates. The results confirm the notion that the predictive power of the Term Structure is dependent upon the forecast period in question.;The paper then proceeds to evaluate the forecast error of the forward rates. It is shown that to a large extent, these errors can be attributed to factors that could not have been plausibly anticipated under efficient markets. Two such factors are explored in depth: unanticipated inflation and policy changes of the Federal Reserve. The purpose here is to illustrate that efficiency is not solely a function of forecast accuracy, but rather how well the bond markets assimilate new information.;The paper concludes by postulating and examining empirically a mean-reversion model of interest rate behavior. By developing such a model, not only is a theoretical framework constructed to address the question of expectations formation, but in addition helps explain the pattern of forecast accuracy given above.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
