Abstract
The aim of this paper is to identify a stationary statistical model for Treasury bill discount changes. We find that the sample variance of discount changes are non-stationary over short differencing intervals but stabilize as the intervals increase to quarterly or semi-annual periods. This result has important implications for pricing options and for analyzing the predictive properties of forward rates. We show that the stochastic process structure leads to a downward revision in estimates of forward rate predictive power.
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