Premium
Term Premium Determinants, Return Enhancement and Interest Rate Predictability
Author(s) -
Deaves Richard
Publication year - 1998
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00199
Subject(s) - predictability , interest rate , term (time) , economics , fixed income , rate of return , econometrics , monetary economics , financial economics , bond , finance , mathematics , statistics , physics , quantum mechanics
This paper investigates whether simple term premium estimation techniques provide potential for return enhancement and interest rate predictability. Using short‐term US government securities, during 1959—93, it is demonstrated that utilization of such knowledge allows investors to enhance returns on fixed income portfolios, provided that other than money market alternatives can be considered as potential repositories of funds. In addition, such knowledge yielded short‐term interest rate predictions that were weakly superior to other methodologies, including the naive no‐change forecast, except during the volatile early 1980s.