Do Long-term Interest Rates Overreact to Short-term Interest Rates?This paper examines the hypothesis that financial markets are myopic by studying the term structure of interest rates. White rejecting decisively the traditional expectations hypothesis regarding the term structure, our statistical results also lead us to conclude that long term interest rates do not overreact to either the level or the change in short termrates. This finding suggests that participants in bond markets are not myopic or overly sensitive to recent events. Our statistical results also suggest that most variations in the yield curve reflect changes in liquidity premia rather than expected changes in interest rates. |
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alternative hypothesis alternative model Asset behavior class of hypotheses current short rate data sets different maturities entire sample equivalent estimate equation Etrt+1 examine excess sensitivity hypothesis excess sensitivity model Exchange Rate expectations hypothesis expectations theory expected future short failure financial markets fluctuations forecasting future short future short rates Gregory Mankiw holding return investors It+1 Joseph E Lawrence H least squares liquidity premia little weight long bond long-term bonds Long-Term Interest Rates market expectation model of overreaction Monetary Policy NBER Working Paper null hypothesis one-period yield partly myopic period profit opportunities Raaj Kumar rate in forecasting rational expectations regression 2.4 risk premium Robert Robert Shiller root mean squared rt+1 Shiller Short-Term Interest Rates six-month bills spread Standard errors Stanley Fischer Stiglitz structure of interest subsample subsection suggest tations hypothesis tations theory term structure three-month and six-month three-month Treasury bills twenty-year bonds two-period uncorrelated variance weighted least squares yield curve