1980/04/01 by James C. Van Horne, James Horne
Economics, Econometrics and Finance · #Stochastic processes and financial applications #Monetary Policy and Economic Impact #Capital Investment and Risk Analysis
paper · doi:10.2307/1057246
The influence of market segmentation on the term structure of interest rates has received considerable attention in recent years. However, an event gone unnoticed in this attention is relaxation in the authority of the Treasury to issue long-term bonds apart from the 41/4 percent interest rate ceiling imposed by Congress. This paper tests the effect of 1971 and 1976 changes in this authority which, in turn, affected the expected supply of long-term relative to short-term securities. In this regard, several widely used expectation models are employed, and new insights are gained into the importance of market segmentation on the term structure of interest rates. The first section of the paper reviews the market segmentation theory while the second investigates the origin, purpose and impact of the 4/4 percent interest rate ceiling. The next section presents the expectations models to be tested, followed by a discussion of the data used. The results of the empirical tests are analyzed in the next section, and implications drawn with respect to the market segmentation theory. Concluding remarks appear in the last section.