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Testing the Expectations Hypothesis in the Brazilian Term Structure of Interest Rates

Author

Listed:
  • Benjamin Miranda Tabak

    (Banco Centra do Brasil)

  • Sandro Canesso de Andrade

    (Banco Central do Brasil)

Abstract

We test the Expectations Hypothesis (EH) plus Rational Expectations (RE) in the Brazilian term-structure of interest rates, using maturities ranging from 1 month to 12 months, and daily data from 1995 to 2000. We rely on two methodologies based on single-equation regressions. Our results indicate a rejection of the EH plus RE, specially at the longer maturity. This may have important implications for the rational expectations macro-modeling currently being used to evaluate the conduct of monetary policy in Brazil. We also show the risk premium in the yield curve are positively related to the covered interest rate differential and to the volatility of interest rates.

Suggested Citation

  • Benjamin Miranda Tabak & Sandro Canesso de Andrade, 2003. "Testing the Expectations Hypothesis in the Brazilian Term Structure of Interest Rates," Brazilian Review of Finance, Brazilian Society of Finance, vol. 1(1), pages 19-43.
    • Handle: RePEc:brf:journl:v:1:y:2003:i:1:p:19-43
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    References listed on IDEAS

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    More about this item

    Keywords

    term structure; expectation hypothesis; risk premium;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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