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Expectations and Risk in the Treasury Bill Market: An Instrumental Variables Approach

Published online by Cambridge University Press:  06 April 2009

David P. Simon
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Abstract

This paper examines rational expectations in the Treasury bill market from 1961 to 1988 with a risk premium specified to be proportional to the volatility of excess returns using instrumental variables. From 1961 to 1972 and from 1972 to 1979, rational expectations cannot be rejected, and both the predictive power of the yield curve and the risk premium are highly significant. By contrast, with just a constant risk premium and with a risk premium proxied by moving averages of absolute interest rate changes, rational expectations are rejected for each subperiod, and the yield curve has significant predictive information only from 1972 to 1979.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 24 , Issue 3 , September 1989 , pp. 357 - 365
Copyright
Copyright © School of Business Administration, University of Washington 1989

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