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3. Data

All data employed in the analysis have monthly frequency. The entire sample goes from January
1964 to June 2007. United States ZCB yields data from January 1964 and December 1998 are from
either the McCulloch-Kown database (3-month, 6-month, and 10-year) or from the Fama-Bliss
dataset (1-, 2-, 3-, 4-, 5-year)3. From January 1999 to June 2007 all yields data are from the
Datastream database (ZCB yields). The effective federal funds rate series is from the Federal
Reserve Economics Database (FRED). Below we plot the federal funds rate, the 3-month, and the
60-month yields from January 1964 to June 2002, the range over which the empirical analysis is
performed.

ffr y3m y60m

Figure 1


Rather than in yields’ level, we are interested in the spreads. We thus compute the spreads between
long term yields and the 3-month yield. Campbell and Shiller (1991) show that the yield spread can
be decomposed into the expected change in short term rates and a term premium:

n-

Eim

t t+mq


m
it


n,m


(1)


q=0


where n denotes the long term maturity and m indicates the short term maturity (m = 3). The term
premium associated to the combination of maturities (
n, m) is tptn,m . The first element on the RHS is
the expectations-based component, otherwise known as the
theoretical, or perfect foresight, spread.

3 McCulloch data are available from the Gregory R. Duffee web page; while the Fama-Bliss yields data are from
Cochrane and Piazzesi (AER, 2005).



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