Empirical evidence has repeatedly shown that future implicit interest rates calculated from the equation representing the expectations theory of the yield curve tend to be upwardly biased estimates of actual future rates of interest.

Question

Quizplus · Accepted Answer

Empirical evidence has indeed shown that the expectations theory, which suggests that the future interest rates can be predicted by the current yield curve, often results in upwardly biased estimates of actual future interest rates. This is because the theory does not account for various risk premiums that investors demand for holding longer-term bonds.

Empirical Evidence Has Repeatedly Shown That Future Implicit Interest Rates