Term Spreads, Forward Rates and Yield Curve Forecasts

Gian Maria Tomat

Research in Economics, 2021, vol. 75, issue 2, 152-163

Abstract: The expectations hypothesis contends that long rates should equal expected forthcoming average short rates. The spread between long and short rates should therefore forecast changes in short rates. In addition, forward rates should anticipate future spot rates. We present econometric evidence for the Euro area in the period from September 2004 to August 2018. In our sample, term spreads are negatively correlated to subsequent interest rate changes. The difference between forward and spot rates is conversely positively correlated to ensuing spot rate changes. Further regression analysis shows, that nominal interest rates do not have predictive properties for future inflation. A vector autoregression analysis whilst revealing medium term overconfidence of Euro area investors, suggests that the propositions of the expectations hypothesis should hold over relatively long periods of time.

Keywords: Spot rate; Forward rate; Yield curve; Inflation (search for similar items in EconPapers)
JEL-codes: E43 G12 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:75:y:2021:i:2:p:152-163

DOI: 10.1016/j.rie.2021.03.003

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