Forecasting with Uncertain Persistence

Joel P. Flynn, Maksim Meinert and Karthik Sastry

No 35411, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: With uncertainty about persistence, we show that forecasts necessarily become more persistent and over-react at long horizons. For these reasons, correctly specified and Bayesian forecasts may under-react at short horizons and over-react at long horizons. These results provide a unified explanation for several asset pricing and forecasting puzzles, including: (i) the excess responsiveness of long-horizon rates to short rates, (ii) the dominance of apparent term premia for long-term rates, (iii) the ex post predictability of bond yields, (iv) the excess volatility of long-horizon forward prices, (v) the excess persistence of long-horizon forecasts, and (vi) the over-reaction of long-horizon forecasts.

JEL-codes: E0 E17 G12 G13 (search for similar items in EconPapers)
Date: 2026-07
Note: AP EFG ME
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