Title: Expectations, Risk Premium, and the Term Structure of Interest Rates: A Behavior Analysis of Experts
Abstract: Using Consensus Economics’ monthly surveys, we will show how experts’ interest rate expectations in the Eurofranc market do not confirm the rational expectations hypothesis. These expectations are found to be generated by a mixed process combining the traditional, adaptive, regressive, and extrapolative models, which are augmented by macroeconomic effects (price, income, and money). This mixed expectational process verifies the term structure relation of interest rates based on the portfolio choice model with a long-term asset and a short-term asset, where a state-space representation is introduced to account for the unobservable part of the long-term asset in the portfolio. As predicted by the theoretical model, the risk premium depends on the conditional expected variance of the short-term asset and on the conditional expected covariance between the latter and inflation, while the estimated value of the relative risk aversion coefficient is found to be economically acceptable. Overall, these results support the theory that experts’ expectations are consistent with the model of the term structure of interest rates.
Publication Year: 2010
Publication Date: 2010-01-01
Language: en
Type: article
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