Interest Rate Innovations and the Volatility of Long-Term Bond Yields
This paper develops and tests restrictions on the variance of innovations in long-term bond yields implied by the expectations model of the term structure. The authors adapt Kenneth D. West's (1988) stock-price volatility tests to the case of long but finite maturity bonds. Their approximate equality restriction does not require short-term rates to be stationary and, hence, provides a unified framework for volatility testing. When short rates are modeled as stationary, long-rate innovations appear excessively volatile. When short rates are modeled as difference stationary, long-rate innovations appear excessively smooth.
||Interest Rate Innovations and the Volatility of Long-Term Bond Yields
Journal of Money, Credit, and Banking (May, 1994)
v. 26, iss. 2, pp. 203-17
||Cushing, Matthew J; Ackert, Lucy F
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|Cushing, Matthew J||Economics