Pure expectations hypothesis Flashcards
1
Q
pure expectations hypothesis claims…
A
that forward rates equal the bond market’s expectations of future spot interest rates.
2
Q
PEH suggests…
A
that implicit forward rates are accurate predictors of expected future spot rates.
3
Q
if PEH is correct…
A
then the shape of the yield curve is also an accurate indicator of expected future spot rates.
4
Q
why doesn’t PEH hold?
A
it is only predictions of future interest rates so PEH cannot fully explain the term structure of interest rates.
