ScholarLens Back to search
1997•The Journal of Financial ResearchRequires access

A VARIANCE DECOMPOSITION ANALYSIS OF THE INFORMATION IN THE TERM STRUCTURE

Louis H. Ederington, Jeremy C. Goh

Open publisher page 0 citations

Abstract

Abstract Based on a market efficiency assumption, we use variance decomposition analysis to separate information in the term structure on expected future spot rates from information on time‐varying term premia and to examine the market's ability to forecast both future rate changes and excess returns on long versus short securities. We find that fluctuations in the slope of the yield curve are due more to changing term premia than to fluctuations in expected future spot rates and that the market correctly predicts about 40 percent of the month‐to‐month changes in spot rates, a considerably higher percentage than that found by previous studies.

About this research paper

What this paper is about

Abstract Based on a market efficiency assumption, we use variance decomposition analysis to separate information in the term structure on expected future spot rates from information on time‐varying term premia and to examine the market's ability to forecast both future rate changes and excess returns on long versus short securities. We find that fluctuations in the slope of the yield curve are due more to changing term premia than to fluctuations in expected future spot rates and that the market correctly predicts about 40 percent of the month‐to‐month changes in spot rates, a considerably higher percentage than that found by previous studies.

Why it matters

A significance statement is not available in the OpenAlex record.

Key contribution

A contribution statement is not available in the OpenAlex record.

Method / approach

Method details are not available in the OpenAlex metadata.

Main findings

Findings are not separately available in the OpenAlex metadata.

Limitations

Limitations are not available in the OpenAlex metadata.

Applications

Application details are not available in the OpenAlex metadata.

Available abstract

Abstract Based on a market efficiency assumption, we use variance decomposition analysis to separate information in the term structure on expected future spot rates from information on time‐varying term premia and to examine the market's ability to forecast both future rate changes and excess returns on long versus short securities. We find that fluctuations in the slope of the yield curve are due more to changing term premia than to fluctuations in expected future spot rates and that the market correctly predicts about 40 percent of the month‐to‐month changes in spot rates, a considerably higher percentage than that found by previous studies.

Key concepts: Yield curve, Term (time), Variance decomposition of forecast errors, Forward rate, Econometrics, Variance (accounting), Economics, Spot contract

Related papers

Related paper 1Related paper 2Related paper 3
Back to paper searchBrowse research topicsOriginal source
A VARIANCE DECOMPOSITION ANALYSIS OF THE INFORMATION IN THE TERM STRUCTURE — Research Paper | ScholarLens