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Further evidence on the rationality of interest rate expectations

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  • Jongen, Ron
  • Verschoor, Willem F.C.

Abstract

This paper extends the limited work on interest rate expectations to a previously unexploited data set that covers a broad range of EMS and non-EMS foreign currency deposits. We corroborate the earlier finding in the literature that interest rate forecasts are not rational and that agents do not use all available information in an efficient manner; this finding applies to the post-1990 period, thus questioning the assertion of Frankel and Froot [Frankel, J.F., Froot, K.A., 1987a. Using survey data to test standard propositions regarding exchange rate expectations. American Economic Review 77, 151] that "the nature of the rejection of rational expectations strongly depends on the sample period". Although forecast errors on EMS rates are smaller and less volatile than errors on non-EMS rates, expectations on EMS rates are nevertheless biased.

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  • Jongen, Ron & Verschoor, Willem F.C., 2008. "Further evidence on the rationality of interest rate expectations," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(5), pages 438-448, December.
    • Handle: RePEc:eee:intfin:v:18:y:2008:i:5:p:438-448
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    Cited by:

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    3. 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.
    4. Prat, Georges & Uctum, Remzi, 2021. "Term structure of interest rates: Modelling the risk premium using a two horizons framework," Journal of Economic Behavior & Organization, Elsevier, vol. 182(C), pages 421-436.
    5. Georges Prat & Remzi Uctum, 2018. "Term structure of interest rates: modelling the risk premium using a two horizons framework," Working Papers hal-04141774, HAL.
    6. Georges Prat & Remzi Uctum, 2016. "Do markets learn to rationally expect US interest rates? Evidence from survey data," Working Papers hal-04141591, HAL.
    7. Kunze, Frederik & Wegener, Christoph & Bizer, Kilian & Spiwoks, Markus, 2017. "Forecasting European interest rates in times of financial crisis – What insights do we get from international survey forecasts?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 192-205.

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