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Expectations and Risk in the Treasury Bill Market: An Instrumental Variables Approach

David P. Simon
The Journal of Financial and Quantitative Analysis
Vol. 24, No. 3 (Sep., 1989), pp. 357-365
DOI: 10.2307/2330816
Stable URL: http://www.jstor.org/stable/2330816
Page Count: 9
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Expectations and Risk in the Treasury Bill Market: An Instrumental Variables Approach
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Abstract

This paper examines rational expectations in the Treasury bill market from 1961 to 1988 with a risk premium specified to be proportional to the volatility of excess returns using instrumental variables. From 1961 to 1972 and from 1972 to 1979, rational expectations cannot be rejected, and both the predictive power of the yield curve and the risk premium are highly significant. By contrast, with just a constant risk premium and with a risk premium proxied by moving averages of absolute interest rate changes, rational expectations are rejected for each subperiod, and the yield curve has significant predictive information only from 1972 to 1979.

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