The Information Content Of Forward Rates: Futher Evidence

Using single-equation estimation methods, researchers have generally found that forward rates have little ability to predict future spot rates. In contrast to that approach, the relationship between forward and spot rates is investigated as a system of simultaneous equations estimable by generalized least squares. The data consist of one- through 12-month Treasury bill rates for the period January 1970-June 1987. The findings show that current forward rates significantly predict future spot rates for various rate maturities up to 12 months ahead. The results also show instances when the T-bill market does not conform to the weak form of market efficiency. Specifically, significant autocorrelation is focused among the changes in the same forward rates over time, a result that is indicative of limited inefficiencies in the T-bill market.