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Are forward premia mean reverting?

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  • Walid Hejazi
  • Zhixin Li

Abstract

The return regression methodology is used to test for mean reversion in the forward market for US T-bills over the period 1964 to 1995. Substantial evidence of mean reversion is found in one- to ten-month forward spreads over the 12 to 24 month horizon. Such evidence is indicative of market inefficiency or speculative dynamics in models with time-invariant term premia. This is not necessarily the case, however, in models with time-varying term premia. We show that forward premia estimated using a multi-factor GARCH model accounts for this evidence, thus reconciling the evidence of mean reversion with market efficiency.

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  • Walid Hejazi & Zhixin Li, 2000. "Are forward premia mean reverting?," Applied Financial Economics, Taylor & Francis Journals, vol. 10(4), pages 343-350.
    • Handle: RePEc:taf:apfiec:v:10:y:2000:i:4:p:343-350
    DOI: 10.1080/09603100050031462
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    References listed on IDEAS

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    Cited by:

    1. Reid Dorsey-Palmateer & Gary Smith, 2007. "Shrunken interest rate forecasts are better forecasts," Applied Financial Economics, Taylor & Francis Journals, vol. 17(6), pages 425-430.
    2. Modena, Matteo, 2008. "Yield curve, time varying term premia, and business cycle fluctuations," MPRA Paper 8873, University Library of Munich, Germany.
    3. Matteo Modena, 2008. "The Term Structure and the Expectations Hypothesis: a Threshold Model," Working Papers 2008_36, Business School - Economics, University of Glasgow.

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