Expected Yield Curve Movements and Rational Term Structure Expectations: An Empirical Note: Comment

Abstract

In this paper, we develop evidence related to the efficiency with which movements in the yield curve for United States government securities are predictable by reference to a representative set of exogenous macroeconomic determinants of forward market rates of interest. This evidence relates importantly to the efficiency with which such macroeconomic information is incorporated into the current position of the yield curve. If the position of the yield curve quickly and fully adjusts to all relevant economic information, then any particular subset of this information (such as that associated with an econometric forward rate structure) will not importantly associate with future movements in the yield curve. Instead, such future movements will primarily be the result of future changes in the state of relevant economic information. However, in the event that current yield curves do not fully reflect relevant economic information, then such information may have predictive content for future yield curves. Thus, this examination of the efficiency with which the yield curve can be predicted has important implications regarding the efficiency with which information is incorporated into the current yield curve. The model employed to achieve this analysis follows Fisherian term structure theory in assuming that forward rates are the most direct representation of variables about which investors hold interest rate expectations. Accordingly, a vital part of our approach to measuring yield-curve expectations is a model explaining expected movements in forward rates. In this regard, we rely upon recent work by ourselves [3] in which a model of forward markets expectations has been developed and found to be well supported by the data in a series of in-sample tests. The substantial explanatory power of our previous model in explaining current forward rates by reference to current macroeconomic variables suggests it is an adequate representation of the process by which changes in information are contemporaneously incorporated into the yield curve. If this same model also leads to efficient predictions, the suggestion is that all the information in the exogenous variables is not incorporated into the current yield curve position; conversely if the