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New Evidence Concerning the Expectations Theory for the Short End of the Maturity Spectrum

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  • Choi, Seungmook
  • Wohar, Mark E

Abstract

This paper reexamines the evidence rejecting the expectations theory of the term structure. Weakly, monthly, and quarterly data on three- and six-month interest rates are employed for five subperiods--1910-1914, 1919-1933, 1934-59, 1959-78, and 1979-89. 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 were for short rates for each subperiod except 1934-59 and 1979-89. 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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Bibliographic Info

Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

Volume (Year): 14 (1991)
Issue (Month): 1 (Spring)
Pages: 83-92

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Handle: RePEc:bla:jfnres:v:14:y:1991:i:1:p:83-92

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Web page: http://www.southwesternfinance.org/
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Cited by:
  1. Sharon Kozicki & P.A. Tinsley, 1997. "Moving endpoints and the internal consistency of agents' ex ante forecasts," Research Working Paper 97-01, Federal Reserve Bank of Kansas City.
  2. Chiang, Thomas C. & Chiang, Jeanette Jin, 1995. "Emperical analysis of short-term eurocurrency rates: Evidence from a transfer function error correction model," Journal of Economics and Business, Elsevier, vol. 47(4), pages 335-351, October.
  3. Shively, Philip A., 2005. "Threshold nonlinear interest rates," Economics Letters, Elsevier, vol. 88(3), pages 313-317, September.
  4. Ravenna , Federico & Seppälä , Juha, 2006. "Monetary policy and rejections of the expectations hypothesis," Research Discussion Papers 25/2006, Bank of Finland.
  5. Azar, Samih Antoine, 2010. "Testing the Expectations Hypothesis on Corporate Bond Yields," Review of Applied Economics, Review of Applied Economics, vol. 6(1-2).
  6. Sharon Kozicki & P.A. Tinsley, 1997. "Shifting endpoints in the term structure of interest rates," Research Working Paper 97-08, Federal Reserve Bank of Kansas City.
  7. Sharon Kozicki & Peter A. Tinsley, . "Moving Endpoints in Macrofinance," Computing in Economics and Finance 1996 _058, Society for Computational Economics.
  8. Smant, David / D.J.C., 2010. "Direct tests of the expectations theory of the term structure: Survey expectations, the term premium and coefficient biases," MPRA Paper 19815, University Library of Munich, Germany.
  9. Ross Guest & Alan McLean, 1998. "New evidence on the expectations theory of the term structure of Australian Commonwealth Government Treasury yields," Applied Financial Economics, Taylor & Francis Journals, vol. 8(1), pages 81-87.
  10. Chiang, Thomas C., 1997. "Time series dynamics of short-term interest rates: evidence from Eurocurrency markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 7(3), pages 201-220, October.
  11. Nourzad, Farrokh & Scott Grennier, R., 1995. "Cointegration analysis of the expectations theory of the term structure," Journal of Economics and Business, Elsevier, vol. 47(3), pages 281-292, August.
  12. Michael Dotsey & Christopher Otrok, 1995. "The rational expectations hypothesis of the term structure, monetary policy, and time-varying term premia," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 65-81.
  13. Chiang, Thomas C. & Kim, Doseong, 2000. "Short-term eurocurrency rate behavior and specifications of cointegrating processes," International Review of Economics & Finance, Elsevier, vol. 9(2), pages 157-179.

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