A COMPARISON OF ALTERNATIVE TERM PREMIUM ESTIMATES

This paper compares rational term premia obtained by projecting ex pos t excess returns on the slope of the yield curve and survey term premi a isolated using the Goldsmith-Nagan interest rate forecasts. The anal ysis demonstrates that: 1) the survey term premia exhibit a strong pos itive relationship with conditional interest rate variances while the rational term premia do not, and 2) the survey forecasts are less accu rate than the forecasts implied by the rational term premia and persis tently under predict (over predict) interest rate levels following the monetary policy rule change in the fourth quarter of 1979 (the third quarter of 1982). The first finding suggests that the survey forecasts reflect market beliefs more accurately than do the implied rational f orecasts. Taken together, findings one and two provide evidence that m arket participants gradually learned about changes in the monetary pol icy rule.