Short-Rate Expectations and Unexpected Returns in Treasury Bonds
Year: 2018
Type: article
Abstract: I document large and persistent errors in investors' expectations about the short-term interest rate over the business cycle. The largest errors arise in economic downturns and during Fed easings when investors overestimate future short rates and, thus, underestimate future bond returns. At a one-year horizon, errors about the path of the real rate (as opposed to inflation) account for 80% of short-rate forecast error variance, with more than half of that number attributed to the Fed easing more aggressively than the public expected. Short-rate forecast errors induce ex post predictability of excess returns on Treasury bonds that is not due to time-varying risk premium.
Source: Review of Financial Studies
DOI: 10.1093/rfs/hhy051
Author: Anna Cieslak
Institutions: Center for Economic and Policy Research, Duke University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3125366357