Abstract
Term structure theory suggests that bond rates in efficient markets approximately follow a random walk. We show that the random walk forecasts of 10-year U.S. Treasury and Moody's Aaa corporate bond rates for 1988–2005 are generally unbiased. Blue Chip forecasts, however, are both biased and inferior to random walk forecasts. Both models produce unbiased forecasts of the default spread, with the random walk again outperforming the Blue Chip. In addition, Blue Chip fails to accurately predict directional change. Emphasizing that the success of the random walk model is theoretically expected, we discuss why experts fail to beat random walk predictions.
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