Predictions of short-term rates and the expectations hypothesis of the term structure of interest rates

Daniel Thornton ()

No 2004-010, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Despite its important role in macroeconomics and finance, the expectations hypothesis (EH) of the term structure of interest rates has received little empirical support. While the EH*s poor performance has been attributed to a variety of sources, none appear to account for the EH*s poor performance. Recent evidence (Diebold and Li, 2003; Duffee, 2002; and Carriero, et al., 2003) suggests the possibility that the EH*s poor performance may be due to market participants* relative inability to forecast the short-term rate. This possibility is investigate by comparing h-month ahead forecasts for the 1-month Treasury yield implied by the EH with the forecasts from both random-walk model and a three factor model of the term structure.

Keywords: Interest rates; Monetary policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets, nep-mac and nep-mon
Date: Written
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Working Paper: Predictions of short-term rates and the expectations hypothesis of the term structure of interest rates (2008)
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