Research

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.

Publication Information
Article Title: Interest Rate Innovations and the Volatility of Long-Term Bond Yields
Journal: Journal of Money, Credit, and Banking (May, 1994)
v. 26, iss. 2, pp. 203-17
Author(s): Cushing, Matthew J;  Ackert, Lucy F
Researcher Information
    
Cushing, Matthew J
Cushing, Matthew J
Professor of Economics
Expertise:
  • Labor Economics
  • Econometrics
  • Macroeconomics
Economics
CoB 525 U
P.O. Box 880489
University of Nebraska-Lincoln
Lincoln, NE 68588-0489, USA
Phone: (402) 472-2323
Fax: (402) 472-9700
mcushing1@unl.edu