Forecasting With Uncertain Persistence

Joel Flynn, Maksim Meinert and Karthik Sastry
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Joel Flynn: Yale University
Maksim Meinert: Yale University
Karthik Sastry: Princeton University

No 2544, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

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.

Pages: 64 pages
Date: 2026-06-26
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