Interest rate expectations predict future long rates, impacting bond market stability.
The study looked at interest rate expectations to test two theories about how interest rates change over time. For short-term bonds, future rates are predicted well, but for long-term bonds, investors don't adjust their expectations enough when short-term rates change. This leads to inaccurate predictions of future long-term rates. Overall, the study found that the expectations theory holds true for longer-term bonds, but not for short-term bonds.