Forward Interest Rates as Predictors of Future US Spot Rates Before and After the 2008 Financial Crisis

Michael Wickens ()
Additional contact information
Michael Wickens: Cardiff University

Open Economies Review, 2022, vol. 33, issue 3, No 1, 406 pages

Abstract: Abstract A feature of the financial crisis rarely mentioned in the academic literature is that afterwards forward interest rates remained persistently higher than future spot rates. Yet, according to the expectations hypothesis, forward interest rates are unbiased predictors of future spot rates. More general theories attribute the forecast errors to term premia. This paper examines whether these theories can explain data for the US that spans the financial crisis and whether alternative approaches provide better forecasts. The main findings are that before the financial crisis the theory of forward rates emanating from the term structure is not rejected and implies term premia of the order of one and a half percentage points After the financial crisis this theory is rejected. An alternative interpretation of forward deviations following the crisis is that they are forecast errors due mainly to monetary policy.

Keywords: Forward interest rates; Term structure; Forecasts of spot interest rates; Financial crisis (search for similar items in EconPapers)
JEL-codes: B22 C58 E43 G12 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11079-021-09637-3 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:openec:v:33:y:2022:i:3:d:10.1007_s11079-021-09637-3

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/11079/PS2

DOI: 10.1007/s11079-021-09637-3

Access Statistics for this article

Open Economies Review is currently edited by G.S. Tavlas

More articles in Open Economies Review from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().