ving average of forward rates at t and at t 1/12. SampleР1964-1999. −РThe second equality introduces the notation γ, ft for corresponding 4 1 vectors. Then,Р ×Рwe can estimate the bn by running the four regressionsР (n) (n)Р hprxt+1 = an + bn (γ0ft)+εt+1, n =2, 3, 4, 5.РThis procedure is consistent. We use GMM standard errors to correct for the fact thatРγ0ft is a generated regressor, along with serial correlation due to overlap.Р This is a restricted model. We describe the (4 maturities 5 right hand variables) =Р20 unrestricted regression coefficients with (4 bs+5γs - 1 normalization)× = 8 parameters.РThe essence of the restriction is that a single bination of forward rates γ0ft isРthe state variable for expected returns of all maturities.Р Tables4and5presentsthefitted values of γ and b.Р 10
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