Article1996

The Expectations Hypothesis of the Term Structure: The UK Interbank Market

93 citations0/0 files storedThe Economic Journal

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Stochastic processes and financial applications

Abstract

Using a high quality weekly data set we provide several tests of the expectations hypothesis EH, using the VAR and cointegration methodologies, for several maturities between 1-week and 12-months, for the UK interbank market. On the basis of the Johansen cointegration analysis there appears to be a ‘break' in the term structure when both the six-month and twelve-month maturities are included as a pair. The latter may be due to either the presence of liquidity constraints or, market segmentation or, a time varying term premium, all of which would invalidate the assumptions underlying the EH. We provide some tentative explanations of these diverse results.

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References

1987Co-Integration and Error Correction: Representation, Estimation, and Testing 1988Testing for a Unit Root in Time Series Regression 1988Statistical analysis of cointegration vectors 1990MAXIMUM LIKELIHOOD ESTIMATION AND INFERENCE ON COINTEGRATION — WITH APPLICATIONS TO THE DEMAND FOR MONEY 2012An Autoregressive Distributed-Lag Modelling Approach to Cointegration Analysis 1992A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics1 1987Cointegration and Tests of Present Value Models 1991Yield Spreads and Interest Rate Movements: A Bird's Eye View

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