Recent literature shows that the risk premium is efficiently estimated in the usual two-pass procedure, estimating betas in the unrestricted model, and then regressing returns on estimated betas. This paper shows that this is not so when allowing for factor unobservability. Imposing the...

We consider as given an arbitrage‐free interest rate model M, and a parametrized family of forward rate curves G. We study the question as to when the given family G is consistent with the dynamics of the interest rate model M, in the sense that M actually will produce forward rate curves...