The Expectations Hypothesis of the Term Structure : A Look at the Polish Interbank Market

Abstract

This paper tests the expectations hypothesis (EH) for the short end of the Polish interbank term structure. Employing daily data, the hypothesis that the actual yield spread is an unbiased predictor of the perfect foresight spread is tested. Additionally, Johansen's FIML procedure is used in order to explore the dynamic comovement of yields across the term structure and also test the parameter restrictions imposed by the EH. The empirical findings provide some evidence in favor of the EH. In particular, there is evidence that all yields share a common stochastic trend. Furthermore, at the margin, the EH restrictions imposed on the cointegration space are not rejected. On balance, one might conclude that the EH is not grossly at variance with the data.

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