Asset pricing program.

• Position: On hedge funds and the implications of the 'predictability smile'

The NBER's Asset Pricing Program met in Cambridge on April 25. Stanley E. Zin, NBER and CarnegieMellon University, organized the session and chose the following papers for discussion:

David Backus, NBER and New York University; Silverio Foresi, Abort Mozumdar, and Liuren Wu, New York University, "Predictable Changes in Yields and Forward Rates"

Discussant: Erzo Luttmer, Northwestern University

William T. Roberds, Federal Reserve Bank of Atlanta, and Charles H. Whiteman, University of Iowa, "Endogenous Term Premia and Anomalies in the Term Structure of Interest Rates: Explaining the Predictability Smile"

Discussant: Robert J. Hodrick, NBER and Columbia University

Qiang Dai, Stanford University, and Kenneth J. Singleton, NBER and Stanford University, "Specification Analysis of Affine Term Structure Markets"

Discussant: David Marshall, Federal Reserve Bank of Chicago

Wayne E. Ferson, NBER and University of Washington, and Andrew F. Siegel, University of Washington, "The Efficient Use of Conditioning Information in Portfolios"

Discussant: John C. Heaton, NBER and Northwestern University

William Fung, Paradigm LDC, and David A. Hsieh, Duke University, "Empirical Characteristics of Dynamic Trading Strategies: the Case of Hedge Funds"

Discussant: Andrew W. Lo, NBER and MIT

W. Brian Arthur, John H. Holland, Richard Palmer, and Paul Tayler, Santa Fe Institute; and Blake D. LeBaron, NBER and MIT, "Asset Pricing Under Endogenous Expectations in an Artificial Stock Market"

Discussam: Bryan Routledge, Carnegie-Mellon University

The first three papers study the behavior of long-term bond yields in relation to short-term interest rates that is, the term structure of interest rates. Recent studies have explored the ability of spreads between long and short yields to forecast subsequent movements in interest rates, and have found that spreads do forecast interest rate movements over short horizons up to about three months, and over long horizons beyond about two years, but do not forecast interest rate movements at intermediate horizons. This pattern is sometimes called a "predictability smile," because a graph of interest rate predictability has the shape of a smile. One explanation for this pattern is that long yields are influenced not only by interest rate movements, but also by changes in risk premiums on long-term bonds.

The papers by Backus et al. and by Roberds and Whiteman ask whether simple models with endogenous time-varying risk premiums can...