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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
Published by: Cambridge University Press on behalf of the University of Washington School of Business Administration
Stable URL: http://www.jstor.org/stable/2330816
Page Count: 9
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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.
The Journal of Financial and Quantitative Analysis © 1989 University of Washington School of Business Administration