Endogenous term premia and anomalies in the term structure of interest rates: Explaining the predictability smile

William Roberds, Charles H. Whiteman

Research output: Contribution to journalArticlepeer-review

26 Scopus citations

Abstract

Numerous studies have documented a 'predictability smile' in the post-war term structure of interest rates: spreads between long rates and short rates predict subsequent movements in short rates provided the long horizon is less than three months or greater than two years, but not for intermediate maturities. Proposed explanations of the smile involve interest rate smoothing by the Fed, time-varying risk premia, 'Peso problems', and measurement error. We show that despite their highly restrictive nature, some parameterizations of the Cox-Ingersoll-Ross (CIR) and Chen-Scott (CS) models of the term structure can account for the predictability smile. CIR and CS parameterizations which are consistent with the smile regularity are inconsistent with other features of the data, however.

Original languageEnglish (US)
Pages (from-to)555-580
Number of pages26
JournalJournal of Monetary Economics
Volume44
Issue number3
DOIs
StatePublished - Jan 1 1999

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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