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Interest Rate Innovations and the Volatility of Long-Term Bond Yields

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  • Cushing, Matthew J
  • Ackert, Lucy F

Abstract

This paper develops and tests restrictions on the variance of innovations in long-term bond yields implied by the expectations model of the term structure. The authors adapt Kenneth D. West's (1988) stock-price volatility tests to the case of long but finite maturity bonds. Their approximate equality restriction does not require short-term rates to be stationary and, hence, provides a unified framework for volatility testing. When short rates are modeled as stationary, long-rate innovations appear excessively volatile. When short rates are modeled as difference stationary, long-rate innovations appear excessively smooth. Copyright 1994 by Ohio State University Press.

Suggested Citation

  • Cushing, Matthew J & Ackert, Lucy F, 1994. "Interest Rate Innovations and the Volatility of Long-Term Bond Yields," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(2), pages 203-217, May.
    • Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:2:p:203-17
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    Cited by:

    1. Ackert, Lucy F. & Racine, M. D., 1999. "Stochastic trends and cointegration in the market for equities," Journal of Economics and Business, Elsevier, vol. 51(2), pages 133-143, March.
    2. Stephen R. Blough, 1994. "Near common factors and confidence regions for present value models," Working Papers 94-3, Federal Reserve Bank of Boston.
    3. Kin-Boon Tang & Shao-Jye Wong & Shih-Kuei Lin & Szu-Lang Liao, 2020. "Excess volatility and market efficiency in government bond markets: the ASEAN-5 context," Journal of Asset Management, Palgrave Macmillan, vol. 21(2), pages 154-165, March.

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