Term Structure of Interest Rates: Expectations and Behavior Patterns

✍ Scribed by Burton Gordon Malkiel

• Publisher: Princeton University Press
• Year: 2015
• Tongue: English
• Leaves: 293
• Series: Princeton Legacy Library; 1927
• Category: Library

✦ Synopsis

Can expectations alone explain the yield differentials among bonds of different maturities? To what extend do attitudes toward risk and transactions costs influence the behavior of bond investors? Is it possible for the Federal Reserve to "twist" the interest-rate structure in accordance with its policy objectives? These are among the questions treated.

Originally published in 1966.

The Princeton Legacy Library uses the latest print-on-demand technology to again make available previously out-of-print books from the distinguished backlist of Princeton University Press. These editions preserve the original texts of these important books while presenting them in durable paperback and hardcover editions. The goal of the Princeton Legacy Library is to vastly increase access to the rich scholarly heritage found in the thousands of books published by Princeton University Press since its founding in 1905.

✦ Table of Contents

Preface
Contents
List of Figures
List of Tables
1. THE YIELD CURVE: METHODS OF CONSTRUCTION AND HISTORICAL PATTERNS
1.1 The Yield Curve
1.2 The Durand Basic Yields
1.3 Yield Relationships for Other Securities
1.4 Recapitulation
2. THE TRADITIONAL EXPECTATIONS THEORY AND ITS CRITICS
2.1 The Traditional Expectations Theory
2.2 Criticisms of the Expectations Theory
a. The Hicksian Liquidity-Premium Model
b. The Hedging-Pressure (or Institutional) Hypothesis
2.3 Early Empirical Attacks on the Expectations Hypothesis
2.4 Meiselman's Test Supporting the Expectations Hypothesis
2.5 Kessel's Empirical Findings Supporting the Hicksian Liquidity-Premium Model
2.6 Conclusion: The Current State of Term-Structure Theory
APPENDIX. YIELDS TO MATURITY, LONG RATES, AND IMPLIED FORWARD RATES
2A.1
The Yield to Maturity of a Bond
2A.2
The True N-Year-Holding-Period Return
2A.3 The Market Price of a Bond
2A.4 Yields to Maturity, Holding-Period Yields, and Forward Rates
2A.5 Some Numerical Examples
2A.6 Calculation of Forward Rates from the Term Structure
3. AN ALTERNATIVE FORMULATION OF THE EXPECTATIONS THEORY
3.1 Factor One: The Mathematics of Bond-Price Movements
3.2 Factor Two: The Normal Range of Interest Rates
3.3 Factor Three: Expectations Proper
3.4 The Self-fulfilling Prophesy and the Greater Volatility of Short Rates
3.5 Introduction of Hicksian Risk Aversion into the Basic Model
3.6 Altering Some Additional Assumptions
3.7 Reconciliation of the Alternative Formulation with the Traditional Theory
3.8 Recapitulation
APPENDIX. EFFECTS OF A CHANGE IN MARKET INTEREST RATES ON BOND PRICES
4. AN EMPIRICAL TEST OF THE REFORMULATED EXPECTATIONS HYPOTHESIS
4.1 Formulation of a Specific Hypothesis
4.2 Some Preliminary Results
4.3 An Alternative Test of the Expectations Hypothesis
4.4 Reconciliation of the Alternative Hypothesis with the Theory
4.5 Some Supplementary Tests
a. Introduction of a Weighted Moving Average
b. Use of Shorter Moving Averages and the Historical Range
c. Estimation by the Liviatan Technique
d. Sensitivity with Respect to the Set of Data Chosen
4.6 Interpretation of Test Results
4.7 Recapitulation
5. TRANSACTIONS COSTS AND THE TERM STRUCTURE OF INTEREST RATES
5.1 Introduction of Transactions Costs
5.2 Description and Classification of Transactions Costs
5.3 The Mathematics of Trading Costs
5.4 Transactions Costs and the Demand for Different Maturities—Case 1: Trading Costs Equal for All Maturities
5.5 A Further Look at Trading Costs
5.6 Trading Costs and the Demand for Different Maturities—Case 2: Trading Costs Increase with Maturity
5.7 Two Blades of the Scissors
5.8 An Analysis of New-Issue Costs
5.9 Transactions Costs and Financial Intermediaries
5.10 Some Cross-Sectional Empirical Evidence
5.11 Conclusion
6. MODIFICATIONS FOR INSTITUTIONAL PREFERENCES AND DIVERSE EXPECTATIONS: SOME EMPIRICAL EVIDENCE ON BEHAVIOR PATTERNS
6.1 The Expectations versus the Hedging-Pressure (or Institutional) Hypothesis
6.2 Some Aggregate, Cross-Sectional Evidence
a. An Analysis of the Treasury Survey of Ownership
b. The Flexibility of Bond Suppliers
6.3 Some Microeconomic Evidence
a. An Analysis of the Portfolio Behavior of Commercial Banks
b. An Analysis of the Behavior of Long-Term Investors
c. The lnfluence of Expectations on Bond Suppliers
6.4 Modifications for Diverse Expectations and the Role of the Professional Speculator
a. Tests for Diversity of Expectations
b. Constraints on the Activity of Professional Speculators
6.5 Recapitulation
7. A SYNTHESIS OF THE EXPECTATIONS AND INSTITUTIONAL THEORIES
7.1 The Objective and Assumptions of the Analysis
7.2 Case 1: Complete Segmentation
7.3 Case 2: Complete Flexibility and Identical Expectations
7.4 Case 3: Introduction of Diverse Expectations
a. Case 3a: Demanders Have Diverse Expectations but No Maturity Preferences—No Supply Flexibility
b. Case 3b: Elements of the Expectations and Segmentation Cases Combined
c. Flexibility in the Supply Function Introduced
d. Case 3c: Diverse Expectations—No Maturity Preferences—Supply Flexibility
7.5 Case 4: Uniform Expectations—Maturity Preferences
7.6 Case 5: Diverse Expectations—Maturity Preferences
7.7 A Generalization to Three Maturities
APPENDIX. A THREE-MARKET MODEL OF THE TERM STRUCTURE
7A.1 The Assumptions and Notation
7A.2 The Holding Curve for the Short Hedgers
7A.3 The Holding Curves for the Long Hedgers
7A.4 Equilibrium Conditions
7A.5 Simplification of the Model
7A.6 Generation of a Humped Yield Curve
7A.7 A Numerical Example
8. SUMMARY AND POLICY IMPLICATIONS
8.1 A Variant of the Traditional Expectations Theory
8.2 Emendations of the Basic Model
8.3 "Operation Twist"
8.4 The Obstacles to Empirical Testing of the Effects of Relative Supplies
a. Inadequacy of the Data on Nongovernment Debt
b. Problems of Classifying the Maturities of Government Debt
c. Difficulties of Dealing with Call Features
d. Simultaneous-Equations Problems
e. Some Additional Complications
8.5 Empirical Tests of the Influence of Relative Supplies
a. Okun's Study
b. Scott's Addition of an Average-Maturity Variable for the Total Debt
c. Wood's Simultaneous-Equation Model
d. Wallace's Model
e. Recapitulation
8.6 The Effectiveness of Operation Twist
a. Was Operation Twist Effectively Implemented?
b. The Behavior of the Rate Structure, 1961-1964
c. The Modigliani and Sutch Test of the Effectiveness of Twist
d. The Results of Some Alternative Specifications of the Expectations-Forming Mechanism
8.7 Factors Responsible for Altering the Term Structure
a. Negotiable Certificates of Deposit and Bank-Portfolio Management
b. Operation Twist and the Formation of Expectations
Glossary
Bibliography
Index