What does the yield curve imply about investor expectations?

We use daily data to model investors' expectations of U.S. yields, at different maturities and forecast horizons. We consider two adaptive learning algorithms to characterize the conditional yield forecasts. Our framework yields the first empirical estimates of the pace of learning by investors. The superior performance of the endogenous learning mechanism suggests that investors account for structural change and respond to significant, persistent deviations by modifying the amount of information they use. Our results provide strong empirical motivation to use the class of adaptive learning models considered here for modeling and analyzing expectation formation by investors.