Bonds

Question 1

In Campbell and Shiller (1991), the expectation hypothesis assumes that?

Answer 1

assumes that the last two terms are constant and small, and run a predictability regression on the yields

Question 2

According to the expectations hypothesis = 1, what do the first two rows show?

Answer 2

a high yield spread between a longer-term and a shorter-term interests predicts a
declining yield on the longer-term bond over the life of the short term bond.

Question 3

What else does the row show (what does it predict)

Answer 3

a high yield spread between a longer-term and a shorter-term interests predicts rising
shorter-term interest rates over the life of the long term bond

Question 4

How does Fama and Bliss differ to Campbell and Shiller what do they test?

Answer 4

Fama and Bliss look at bond predictability by looking directly at bond returns, as
opposed to bond yields

Question 5

Conclusions Fama and Bliss (2)

Answer 5

The expectations hypothesis does well at short horizons but performs poor at longer horizons.

A high forward rate seems to entirely indicate that you will earn that more in holding long term bonds than short.