Interest Rate Innovations and the Volatility of Long-Term Bond Yields
Matthew J Cushing and
Lucy Ackert ()
Journal of Money, Credit and Banking, 1994, vol. 26, issue 2, 203-17
This paper develops and tests restrictions on the variance of innovations in long-term bond yields implied by the expectations model of the term structure. The authors adapt Kenneth D. West's (1988) stock-price volatility tests to the case of long but finite maturity bonds. Their approximate equality restriction does not require short-term rates to be stationary and, hence, provides a unified framework for volatility testing. When short rates are modeled as stationary, long-rate innovations appear excessively volatile. When short rates are modeled as difference stationary, long-rate innovations appear excessively smooth. Copyright 1994 by Ohio State University Press.
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:26:y:1994:i:2:p:203-17
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