Malkiel, Burton G.
May 1962
Quarterly Journal of Economics;May62, Vol. 76 Issue 2, p197
Academic Journal
This article examines the principle hypotheses which have been offered to explain the relationship of short term and long term rates. The relation of short-term to long-term yields has often intrigued both economic theorists and investment analysts. This relationship, usually referred to as the structure of interest rates, has been characterized by significantly divergent patterns. Economists have typically formulated theories of the structure of interest rates in terms of bond yields to the exclusion of bond prices. An examination of these relationships alone brings us immediately to an important conclusion. Empirical investigations of the shape of the yield curve show that the curve invariably flattens out as term to maturity is extended. Historical interest rate movements would suggest, however, that such a drastic drop in the level of rates has been associated with secular rather than cyclical movements. To the extent that institutional rigidities lead to relatively greater volatility in short rates, it is not true that the activities of arbitrageurs will necessarily work in the direction of smoothing these additional yield fluctuations.


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