Does PEH matter?
Most finance students at one point or another have the Pure
Expectations Hypothesis. The professor will show term structure data, and then
say something like…
“If PEH holds (big if) we can use today’s data to calculate
what the market expectations are for next year’s rates. “
How good are these predictions?
Based on 2010’s daily term structure data, I calculated the PEH
expectations for 2011. Take a look for yourself. The chart below shows the
prediction and the real outcome.
Will they come closer?