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A Reconciliation of Some Paradoxical Empirical Results on the Expectations Model of the Term Structure

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  • Driffill, John
  • Psaradakis, Zacharias
  • Sola, Martin

Abstract

In this paper, the authors attempt to reconcile contradictory empirical results for the expectations model of the term structure which are found when it is tested by a variety of methods based on single-equation and vector autoregression (VAR) models. Using monthly data for one-month and three-month interest rates, the authors show that the expectations hypothesis is rejected for the United States and United Kingdom term structures on the basis of some popular tests. However, tests based on VAR models or on instrumental variables regressions of yield spreads on future short rate changes provide no evidence against the expectations model with a random component in the term premium. Copyright 1997 by Blackwell Publishing Ltd

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Bibliographic Info

Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics & Statistics.

Volume (Year): 59 (1997)
Issue (Month): 1 (February)
Pages: 29-42

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Handle: RePEc:bla:obuest:v:59:y:1997:i:1:p:29-42

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Cited by:
  1. Bredin, Don, 2001. "Alternative Tests of the Expectations Hypothesis of the Term Structure of Interest Rates," Research Technical Papers 2/RT/01, Central Bank of Ireland.
  2. Esteve, Vicente, 2006. "A note on nonlinear dynamics in the Spanish term structure of interest rates," International Review of Economics & Finance, Elsevier, vol. 15(3), pages 316-323.
  3. Camarero, Mariam & Tamarit, Cecilio, 2002. "Instability tests in cointegration relationships. An application to the term structure of interest rates," Economic Modelling, Elsevier, vol. 19(5), pages 783-799, November.
  4. Massimo Guidolin & Daniel L. Thornton, 2010. "Predictions of short-term rates and the expectations hypothesis," Working Papers 2010-013, Federal Reserve Bank of St. Louis.
  5. 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.
  6. Iglesias Vázquez, E.M. & Arranz Pérez, M., 2001. "Análisis de las relaciones entre el tipo de interés a corto plazo y su incertidumbre en Alemania, España y Suiza," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 19, pages 37-47, Diciembre.
  7. Tzavalis, Elias, 2004. "The term premium and the puzzles of the expectations hypothesis of the term structure," Economic Modelling, Elsevier, vol. 21(1), pages 73-93, January.
  8. Brooks, Chris & Rew, Alistair G., 2002. "Testing for non-stationarity and cointegration allowing for the possibility of a structural break: an application to EuroSterling interest rates," Economic Modelling, Elsevier, vol. 19(1), pages 65-90, January.
  9. Daniel L. Thornton, 2004. "Tests of the expectations hypothesis: resolving the Campbell-Shiller paradox," Working Papers 2003-022, Federal Reserve Bank of St. Louis.
  10. Petko Kalev & Brett Inder, 2006. "The information content of the term structure of interest rates," Applied Economics, Taylor & Francis Journals, vol. 38(1), pages 33-45.

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