The Expectations Theory

The Expectations Theory – How Accurate are the Expected Rates? (28 points) The Treasury’s web-site reports daily data on historical yields of treasury bonds. Starting in 1990, compute the expected one-year rate one-year from the beginning of each year’s June. Analyze whether expected one-year rates are good predictors of actual/realized rates (i.e., run regressions of realized rates on expected rates, and report/interpret the coefficient estimates and the model fit). Repeat the above analysis for one-year rates two-year from the beginning of each year. Compare the findings with those from the earlier analysis of one-year expected rates. Are expectations of one-year rates more accurate for one-year or two-year into the future? Explain your findings clearly. http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldAll Minutes of the FOMC meetings is available at the Federal Reserve’s web-site. http://federalreserve.gov/newsevents/press/monetary/20110921a.htm http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield