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A Reexamination of Traditional Hypotheses about the Term Structure: A Comment

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  • McCulloch, J Huston

Abstract

An example of a continuous time economy is given whose general equilibrium term structure of interest rates obeys the Expectations Hypothesis for continuously compounded interest rates and returns, contradicting the 1981 claim by Cox, Ingersoll, and Ross that such an economy is mathematically impossible. This example does not generate exploitable arbitrage opportunities of the type Cox, Ingersoll, and Ross claim must arise. The 'Logarithmic Expectations Hypothesis,' as we call it, is therefore an acceptable benchmark from which to measure term premia in continuous time term structure modeling. Copyright 1993 by American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 48 (1993)
Issue (Month): 2 (June)
Pages: 779-89

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Handle: RePEc:bla:jfinan:v:48:y:1993:i:2:p:779-89

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Cited by:
  1. Longstaff, Francis A., 2000. "The term structure of very short-term rates: New evidence for the expectations hypothesis," Journal of Financial Economics, Elsevier, vol. 58(3), pages 397-415, December.
  2. Wang, Jiang, 1959-, 1995. "The term structure of interest rates in a pure exchange economy with heterogeneous investors," Working papers 3839-95., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Jondeau, Eric & Ricart, Roland, 1999. "The expectations hypothesis of the term structure: tests on US, German, French, and UK Euro-rates," Journal of International Money and Finance, Elsevier, vol. 18(5), pages 725-750, October.
  4. Jiang Wang, 1995. "The Term Structure of Interest Rates in a Pure Exchange Economy with Heterogeneous Investors," NBER Working Papers 5172, National Bureau of Economic Research, Inc.
  5. Avouyi-Dovi, S. & Jondeau, E., 1999. "Interest Rate Transmission and Volatility Transmission along the Yield Curve," Working papers 57, Banque de France.
  6. Buraschi, Andrea & Jiltsov, Alexei, 2005. "Inflation risk premia and the expectations hypothesis," Journal of Financial Economics, Elsevier, vol. 75(2), pages 429-490, February.
  7. Jondeau, E. & Ricart, R., 1996. "The Expectation Theory: Tests on French, German, and American Euro-Rates," Working papers 35, Banque de France.

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