Uncertainty and Implied Variance Bounds in Long-Memory Models of the Interest Rate Term Structure.

We find that long-term uncertainty in a linear model of the interest rate term structure can have dramatic effects on variance bounds implied by the expectations theories of the term structure. We bootstrap fractionally integrated models of the term structure of interest rates. The fractional order of integration's bootstrapped standard errors simulate uncertainty surrounding long-term forecasts of interest rates, and we find that it is possible to overstate the significance of variance-bounds violations by at least a factor of three and perhaps by a factor of ten when long-term uncertainty is ignored.