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Forward Interest Rates as Predictors of Future US Spot Rates Before and After the 2008 Financial Crisis

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  • Michael Wickens

    (Cardiff University
    University of York)

Abstract

A feature of the financial crisis rarely mentioned in the academic literature is that afterwards forward interest rates remained persistently higher than future spot rates. Yet, according to the expectations hypothesis, forward interest rates are unbiased predictors of future spot rates. More general theories attribute the forecast errors to term premia. This paper examines whether these theories can explain data for the US that spans the financial crisis and whether alternative approaches provide better forecasts. The main findings are that before the financial crisis the theory of forward rates emanating from the term structure is not rejected and implies term premia of the order of one and a half percentage points After the financial crisis this theory is rejected. An alternative interpretation of forward deviations following the crisis is that they are forecast errors due mainly to monetary policy.

Suggested Citation

  • Michael Wickens, 2022. "Forward Interest Rates as Predictors of Future US Spot Rates Before and After the 2008 Financial Crisis," Open Economies Review, Springer, vol. 33(3), pages 391-406, July.
    • Handle: RePEc:kap:openec:v:33:y:2022:i:3:d:10.1007_s11079-021-09637-3
    DOI: 10.1007/s11079-021-09637-3
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    References listed on IDEAS

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    More about this item

    Keywords

    Forward interest rates; Term structure; Forecasts of spot interest rates; Financial crisis;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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