A Simple Account of the Behavior of Long-Term Interest Rates

31 Pages Posted: 9 Mar 2004 Last revised: 17 Apr 2022

See all articles by John Y. Campbell

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Robert J. Shiller

Yale University - Cowles Foundation; National Bureau of Economic Research (NBER); Yale University - International Center for Finance

Date Written: September 1983

Abstract

Recent empirical research on the term structure of interest rates has shown that the long-term interest rate is well described by adistributed lag on short-term interest rates, but does not conform to the expectations theory of the term structure. It has been suggested that the long rate "overreacts" to the short rate. This paper presents aunified taxonomy of risk premia, or deviations from the expectations theory. This enables the hypothesis of overreaction to be formally stated. It is shown that, if anything, the long rate has underreacted to the short rate. However, the independent movement of the long rate is primarily responsible for the failure of the expectations theory.

Suggested Citation

Campbell, John Y. and Shiller, Robert J., A Simple Account of the Behavior of Long-Term Interest Rates (September 1983). NBER Working Paper No. w1203, Available at SSRN: https://ssrn.com/abstract=305580

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Robert J. Shiller

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