Article1991

NEW EVIDENCE CONCERNING THE EXPECTATIONS THEORY FOR THE SHORT END OF THE MATURITY SPECTRUM

29 citations0/0 files storedThe Journal of Financial Research

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

Abstract

Abstract This paper re‐examines the evidence rejecting the expectations theory of the term structure. Weekly, monthly, and quarterly data on three‐ and six‐month interest rates are employed for five subperiods—1910–1914, 1919–1933, 1934–1959, 1959–1978, and 1979–1989. Econometric techniques are used to correct standard errors for overlapping data and for heteroscedasticity. Findings indicate that the weekly and monthly data are consistent with a weak form of the expectations hypothesis in which the yield curve has substantial predictive power for short rates for each subperiod except 1934–1959 and 1979–1989. Results for the period before the founding of the Federal Reserve indicate that a strong version of the expectations hypothesis cannot be rejected in which the joint hypothesis of rational expectations and expectations theory is hypothesized. The use of cointegration tests and an error‐correction model framework to determine whether short and long rates have a common stochastic trend indicates that long and short rates are cointegrated.

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References

1987Co-Integration and Error Correction: Representation, Estimation, and Testing 1979Distribution of the Estimators for Autoregressive Time Series with a Unit Root 1979Distribution of the Estimators for Autoregressive Time Series With a Unit Root 1980Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis 1987Forecasting and testing in co-integrated systems 1986The Changing Behavior of the Term Structure of Interest Rates 1988The Predictive Power of the Term Structure During Recent Monetary Regimes 1988The information in the term structure: Some further results

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2005Monetary Policy and the Term Structure of Interest Rates 2009The comparative role of iShares and country funds in internationally diversified portfolios 1995The Rational Expectations Hypothesis of the Term Structure, Monetary Policy, and Time-Varying Term Premia 1996Cointegration and the term structure: A multicountry comparison 2002The effect of interest rate volatility on treasury yields

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