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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. Minutes of the FOMC meetings is available at the Federal Reserve’s web-site.

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