CRIF Working Paper No. 02012

Predictable Changes in Yields and Forward Rates

Title: Predictable Changes in Yields and Forward Rates

Authors: David Backus (New York University)

              Silverio Foresi (Goldman Sachs Asset Management)

              Abon Mozumdar (Virginia Tech)

              Liuren Wu (Fordham University)

Contact: wu@fordham.edu

Keywords: Forecasting, term premiums, expectations hypothesis, pricing kernels, affine models.

JEL Classification: E43, G12

Abstract: We make two contributions to the study of interest rates. The first is to characterize their dynamics in a new way. We estimate forecasting relationships based on one-period changes in forward rates, which are more easily compared than earlier work on yields to the stationary theory of bond pricing. The second is to approximate these dynamics and other salient features of interest rates with an affine model. We show that models with "negative" factors come closer to accounting for the properties of interest rates, including their dynamics, than multifactor Cox-Ingersoll-Ross models. 

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Comments: The paper is published in Journal of Financial Economics, 2001, 59(3), 281-311.