Articlegreen1996

Long Forward and Zero-Coupon Rates Can Never Fall

Philip H. Dybvig · Jonathan E. Ingersoll · Stephen A. Ross

208 citations0/0 files storedThe Journal of Business

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Stochastic processes and financial applications Monetary Policy and Economic Impact Financial Markets and Investment Strategies

Abstract

In frictionless markets having no arbitrage, the asymptotic zero-coupon rate never falls. The same is true of the long forward rate. The long par-coupon rate can rise and fall due to forward rate movements at short maturities. This paper relates the three types of interest rate and formalizes and proves the impossibility results for falling asymptotic rates. These results can be tested in a parametric term structure specification that is rich enough to identify a time series of long rates. The results show that it is not possible to specify arbitrarily the long forward or zero-coupon rate process.

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References

1977An equilibrium characterization of the term structure 1979Martingales and arbitrage in multiperiod securities markets 1986Term Structure Movements and Pricing Interest Rate Contingent Claims 1981Arbitrage and equilibrium in economies with infinitely many commodities 1980An Analysis of Variable Rate Loan Contracts 1988Inefficient Dynamic Portfolio Strategies or How to Throw Away a Million Dollars in the Stock Market

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