Are forward premia mean reverting?

Walid Hejazi and Zhixin Li

Applied Financial Economics, 2000, vol. 10, issue 4, 343-350

Abstract: The return regression methodology is used to test for mean reversion in the forward market for US T-bills over the period 1964 to 1995. Substantial evidence of mean reversion is found in one- to ten-month forward spreads over the 12 to 24 month horizon. Such evidence is indicative of market inefficiency or speculative dynamics in models with time-invariant term premia. This is not necessarily the case, however, in models with time-varying term premia. We show that forward premia estimated using a multi-factor GARCH model accounts for this evidence, thus reconciling the evidence of mean reversion with market efficiency.

Date: 2000
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DOI: 10.1080/09603100050031462

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