Working Paper: NBER ID: w1508
Authors: John Y. Campbell
Abstract: Expectations theories of asset returns may be interpreted as stating either that risk premia are zero, or that they are constant through time. Under the former interpretation, different versions of the expectations theory of the term structure are inconsistent with one another, but I show that this does not necessarily carry over to the constant risk premium interpretation of the theory. Furthermore, I argue that differences among expectations theories are of 'second order" in a precise mathematical sense. I present an approximate linearized framework for analysis of the term structure in which these differences disappear, and I test its accuracy in practice using data from the CRSP government bond tapes.
Keywords: term structure of interest rates; risk premia; expectations theory; bond yields
JEL Codes: G12; E43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expectations theory (D84) | risk premia (G22) |
| risk premia can be zero or constant (D81) | expectations theory (D84) |
| inconsistencies among expectations theories (D84) | empirical work (C90) |
| linearized framework (C51) | reconciliation of theories (D74) |
| expected differences between holding returns and spot rates (E43) | bond yield data (G12) |