Working Paper: NBER ID: w1203
Authors: John Y. Campbell; Robert J. Shiller
Abstract: Recent empirical research on the term structure of interest rates has shown that the long-term interest rate is well described by adistributed lag on short-term interest rates, but does not conform to the expectations theory of the term structure. It has been suggested that the long rate "overreacts" to the short rate. This paper presents aunified taxonomy of risk premia, or deviations from the expectations theory. This enables the hypothesis of overreaction to be formally stated. It is shown that, if anything, the long rate has underreacted to the short rate. However, the independent movement of the long rate is primarily responsible for the failure of the expectations theory.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| long-term interest rate (E43) | expectations theory failure (D84) |
| short-term interest rates (E43) | long-term interest rate (E43) |
| lagged short-term interest rates (E43) | long-term interest rate (E43) |
| risk premium (G19) | long-term interest rate (E43) |