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The Relation Between Default‐Free Interest Rates and Expected Economic Growth Is Stronger Than You Think
Author(s) -
KAMARA AVRAHAM
Publication year - 1997
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1997.tb01126.x
Subject(s) - treasury , futures contract , economics , spot contract , extant taxon , interest rate , consumption (sociology) , monetary economics , investment (military) , risk premium , relation (database) , yield (engineering) , financial economics , econometrics , computer science , history , social science , materials science , archaeology , database , evolutionary biology , sociology , biology , politics , political science , law , metallurgy
The relation between default‐free interest rates and expected economic growth is substantially stronger than suggested by extant literature. Futures‐implied Treasury bill yield spreads are more highly correlated with future real consumption, investment, and GNP growth than spot spreads. This stronger relation arises because using futures removes a component of the spot term structure that covaries negatively with real economic growth. Treasury forward rates from spot bills contain a premium for the risk that short‐sellers will default. This risk premium is negatively related to expected economic growth.