Eugene Fama found that 1-year forward rates on these securities forecast interest changes 2-4 years ahead. For 10 points each:
[10e] Name these fixed-income securities through which individual investors lend money to the government.
ANSWER: government bonds [accept municipal bonds; accept Treasury bonds; accept savings bonds; reject “private bonds” or “corporate bonds”]
[10h] In a later study of this bond metric, Cochrane and Piazzesi generalized Fama’s forecast to bond returns at all maturities. This metric is calculated as the difference between the risk-free rate and the estimated rate of return.
ANSWER: risk premium [accept term premium; prompt on premium; reject “risk”]
[10m] Cochrane and Piazzesi have proposed a model based on this technique with a single return-forecasting factor. This statistical technique estimates the relationship between several explanatory variables and one response variable.
ANSWER: multiple regression [accept linear regression; accept linear multiple regression]
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