#2003-021C "The Empirical Failure of the Expectations Hypothesis of the Term Structure of Bond Yields"
by Lucio Sarno, Daniel L. Thornton, and Giorgio Valente
August 2003
Revised August 2005

This paper tests the expectations hypothesis (EH) using US monthly data for bond yields spanning the 1952-2003 sample period and ranging in maturity from 1 month to 10 years. We apply the Lagrange multiplier test developed by Bekaert and Hodrick (2001) and extend it to increase the test power: (a) by introducing economic variables as conditioning information; and (b) by using more than two bond yields in the model and testing the EH jointly on more than one pair of yields. More...

PUBLISHED: Journal of Financial and Quantitative Analysis, March 2007, 42(1), pp. 81-100

#2002-005B "Federal Funds Rate Prediction"
by Lucio Sarno, Daniel L. Thornton, and Giorgio Valente
January 2002
Revised November 2002

We examine the forecasting performance of a range of time-series models of the daily US effective federal funds (FF) rate recently proposed in the literature. We find that: (i) most of the models and predictor variables considered produce satisfactory one-day-ahead forecasts of the FF rate; (ii) the best forecasting model is a simple univariate model where the future FF rate is forecast using the current difference between the FF rate and its target; (iii) combining the forecasts from various models generally yields modest improvements on the best performing model. More...

PUBLISHED: Journal of Money, Credit, and Banking, June 2005, 37(3), pp. 449-71