On Expectations, Term Premiums and the Volatility of Long-Term Interest Rates

James Pesando

No 595, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The paper first identifies how large must be the range in which ex ante yields on long-relative to short-term bonds vary if term premiums -- are to account for a significant fraction of the variance of the holding- period yields on long-term bonds. This paper then extends Shiller's bound to the case of a time-varying term premium and readily identifies the variance in the term premium necessary to salvage the efficient markets model if the variance of these holding-period yields exceeds the bound implied by the rational expectations model. The role of transactions costs is noted and the possibility explored that evidence of excess volatility need not imply the existence of unexploited profit opportunities under the rational expectations model.

Date: 1980-12
Note: ME
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Published as Pesando, James E. "On Expectations, Term Premiums and the Volatility of Long-Term Interest Rates." Journal of Monetary Economics, Vol. 12, No. 3, (September 1983), pp. 467-74.

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Journal Article: On expectations, term premiums and the volatility of long-term interest rates (1983)
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