Tuckman : The evolution of short rates and the shape of the term structure
4 important questions on Tuckman : The evolution of short rates and the shape of the term structure
How useful are forecasts about future interest rates?
can be very useful in describing the shape and level of the term structure over short-term horizons, but probably only the level of rates at very long horizons.
What is the effect of volatility on the term structure?
It depresses (lowers) the term structure.
Example; certain spot rate of 10% vs. uncertainty of rate of 8% or 12%.
What is the effect of convexity on yield?
Yield is depressed (lowered) by convexity. Convexity grows when the volatility grows.
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Explain the pure expectations theory
The shape of the spot rate curve is determined solely by expected future spot rates. (this seems unrealistic)
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