On the Random Walk Characteristics of Short- and Long-Term Interest Rates In an Efficient Market

Pesando, James E.

doi:10.2307/1992047

Cited by 61 publications

(42 citation statements)

References 11 publications

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“…The sample begins in 1983(1) after the abolishment of the non-borrowed reserves targeting policy, and ends in 2008 (9). We begin an additional sub-sample in 1988(1) after the start of the Greenspan era and the stock market crash.…”

Section: Empirical Evidencementioning

confidence: 99%

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The US term structure and central bank policy

Weber

Wolters

2012

Applied Economics Letters

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The expectations hypothesis of the term structure (EHT) implies cointegration between interest rates of different maturities and predicts certain values for adjustment speed. We estimate reduced-form vector error correction models of the US term structure. These are derived from a structural model combining the EHT, autocorrelated risk premia, interest rate smoothing and monetary policy feedback, which is able to capture a wide range of empirical outcomes. We explicitly test the necessary preconditions for the validity of the theoretical model. Premia persistence rises with longer-rate maturity, while the influence of the according spreads in the central bank reaction function diminishes.

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Section: Empirical Evidencementioning

confidence: 99%

“…Thereby, long-term rates will be weakly exogenous, approximately following random walks (see Pesando 1979). Assuming rational expectations, E t r t+1 = r t+1 + e t+1 , with the expectation error e t , the EC equation for the short-term rate in the two-period case (n = 2) results as…”

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confidence: 99%

The US term structure and central bank policy

Weber

Wolters

2012

Applied Economics Letters

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“…This paper is designed to help in such an assessment. Its primary contribution is an examination of the efficiency of no-change model forecasts.I f the market for fixed-income securities is efficient and if expectations of future short rates are embedded in current long-term rates, long-term rates should follow approximately a martingale sequence (Pesando, 1979)J In such an environment, the no-change model should produce efficient near-term forecasts of longer-term rates, with efficiency becoming less precise as the forecast horizon is lengthened (Pesando, 1981).I build on this research by estimating the longest forecast horizon for which nochange predictions of three mortgage or mortgage-related interest rates are efficient. The interest rates include the 30-year, fixed-rate conventional home mortgage rate; the current-coupon GNMA (Government National Mortgage Association) rate; and the one-year Treasury bill rate, which is often used as the base rate in adjustable rate mortgage agreements.…”

mentioning

confidence: 99%

“…I f the market for fixed-income securities is efficient and if expectations of future short rates are embedded in current long-term rates, long-term rates should follow approximately a martingale sequence (Pesando, 1979)J In such an environment, the no-change model should produce efficient near-term forecasts of longer-term rates, with efficiency becoming less precise as the forecast horizon is lengthened (Pesando, 1981).…”

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confidence: 99%

Martingales and efficient forecasts of effective mortgage rates

Reichenstein

1989

J Real Estate Finan Econ

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Economic theory and empirical evidence indicate that the optimal near-term forecast of a long-term rate is (approximately) today's rate; the no-change model should provide excellent near-term forecasts of a long-term rate. This article estimates the longest tbrecast horizon over which no-change predictions of each of three mortgage-related interest rates pass a series of quality tests. The empirical results reject the optimality of no-change predictions of the one-year Treasury bill rate for all forecast horizons. Since October 1979, the tests support the hypothesis that no-change predictions of the 30-year conventional home mortgage and GNMA rates are optimal for forecast horizons of up to threequarters-ahead.Interest rate forecasts are of more than passing concern to commercial banks, savings and loan associations, and many private and institutional players in the real estate market. Key financial decisions often hinge on the forecast that is deemed the best. At the same time, it is not always clear how to assess the merits of alternative interest rate forecasts. This paper is designed to help in such an assessment. Its primary contribution is an examination of the efficiency of no-change model forecasts.I f the market for fixed-income securities is efficient and if expectations of future short rates are embedded in current long-term rates, long-term rates should follow approximately a martingale sequence (Pesando, 1979)J In such an environment, the no-change model should produce efficient near-term forecasts of longer-term rates, with efficiency becoming less precise as the forecast horizon is lengthened (Pesando, 1981).I build on this research by estimating the longest forecast horizon for which nochange predictions of three mortgage or mortgage-related interest rates are efficient. The interest rates include the 30-year, fixed-rate conventional home mortgage rate; the current-coupon GNMA (Government National Mortgage Association) rate; and the one-year Treasury bill rate, which is often used as the base rate in adjustable rate mortgage agreements. The time periods examined are the eightyear periods bracketing the October 1979 change in monetary policy.

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“…There is a long tradition of modeling interest rates as martingale processes. Arguments supporting martingale expectations date back to Sargent (1976) and Pesando (1979). Elliott and Baier (1979) found empirical evidence for the use of martingale forecasts of interest rates.…”

Section: Data Descriptionmentioning

confidence: 99%

The Currency Equivalent Index and the Current Stock of Money

Kelly

2008

SSRN Journal

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The currency equivalent index provides an elegant method for measuring the stock of money, but it rests upon assumptions that do not match an important characteristic of the data. Thus, it is unclear what, if anything, the CE measures. This paper attempts to answer this question by deriving the current stock of money (CSM), which is dened to be the discounted present value of the monetary service ows provided by only the current portfolio of monetary assets, and then analyzing the assumptions under which the current stock of money can be measured by the currency equivalent index.

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On the Random Walk Characteristics of Short- and Long-Term Interest Rates In an Efficient Market

Cited by 61 publications

References 11 publications

The US term structure and central bank policy

The US term structure and central bank policy

Martingales and efficient forecasts of effective mortgage rates

The Currency Equivalent Index and the Current Stock of Money

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