The Expectations Hypothesis of the Term Structure and Time-Varying Risk Premia: A Panel Data Approach
AbstractOne implication of the expectations hypothesis is that the yield spread should forecast subsequent changes in the long yield. However, regression tests based on this specification strongly reject the expectations hypothesis. One explanation for this rejection is that these tests fail to allow for a time varying risk premium that is correlated with this yield spread, leading to a bias in the estimated regression coefficients. This paper uses panel data in order to test the expectations hypothesis under the assumption that risk premia are time-varying but driven by a single factor. It is found that while the expectations hypothesis is still rejected, the bias in the estimated coefficient is very substantially reduced. Copyright 2001 by Blackwell Publishing Ltd
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Bibliographic InfoArticle provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics & Statistics.
Volume (Year): 63 (2001)
Issue (Month): 2 (May)
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- Cuthbertson, Keith & Nitzsche, Dirk, 2003. "Long rates, risk premia and the over-reaction hypothesis," Economic Modelling, Elsevier, Elsevier, vol. 20(2), pages 417-435, March.
- Bulkley, George & Harris, Richard D.F. & Nawosah, Vivekanand, 2011. "Revisiting the expectations hypothesis of the term structure of interest rates," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(5), pages 1202-1212, May.
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- Christina Nikitopoulos-Sklibosios & Eckhard Platen, 2012. "Alternative Term Structure Models for Reviewing Expectations Puzzles," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 305, Quantitative Finance Research Centre, University of Technology, Sydney.
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