Predicting Interest Rates: A Comparison of Professional and Market- Based Forecasts

Abstract

Interest rates have varied substantially in recent years. Since 1981, for example, the monthly average three-month Treasury bill rate has ranged between 5.18 percent and 16.30 percent while the Baa corporate bond rate ranged between 9.61 percent and 17.18 percent; the prime rate during this time reached a high of 20.5 percent and fell to a low of 7.5 percent. Interest rate movements are important, of course, because they affect the present value of streams of future payments, that is, wealth. Moreover, the risk of interest rate changes is related directly to the level of interest rates.’ During the l980s, therefore, firms and individuals have faced substantial exposure to interest rate risk