Capital asset prices versus time series models as predictors of inflation: The expected real rate of interest and market efficiency

• Published in: Journal of financial economics 1975-12, Vol.2 (4), p.341-360
• Main Authors: Hess, Patrick J., Bicksler, James L.
• Format: Article
• Language: English
• ISSN: 0304-405X; 1879-2774
• DOI: 10.1016/0304-405X(75)90009-4

This paper examines the robustness of one month treasury bills as predictors of inflation. The evidence is inconsistent with the joint hypothesis that (1) the expected real rate of interest was constant for one-month bills and (2) that markets are efficient with regard to the time series of inflation. When the expected real rate of interest is set equal to the conditional expectation given the time series of real rates, the results are much more consistent with the efficient markets model. In more positive terms, the failure to confirm market efficiency appears to be the result of naive estimates of the expected real rate.