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Further analysis of the expectations hypothesis using very short-term rates

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Author Info

  • Brown, Craig R.
  • Cyree, Ken B.
  • Griffiths, Mark D.
  • Winters, Drew B.
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    Abstract

    Longstaff [Longstaff, F., 2000. The term structure of very short-term rates: new evidence for the expectations hypothesis. Journal of Financial Economics 58, 397-415] finds support for the expectations hypothesis at the very short end of the repurchase agreement (repo) term structure while other studies find calendar-time-based regularities cause rejection of the expectations hypothesis. Using Longstaff's methods on a sample of repo rates that pre-dates Longstaff's sample, we reject the expectations hypothesis for every maturity. The pre-Longstaff-sample repo data comes from a time period where the behavior of short-term interest rates is similar to the long-run average behavior of short-term interest rates. Our results imply that expectations hold when rates are less volatile and/or that we may be entering a period of lower volatility.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 32 (2008)
    Issue (Month): 4 (April)
    Pages: 600-613

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    Handle: RePEc:eee:jbfina:v:32:y:2008:i:4:p:600-613

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    Web page: http://www.elsevier.com/locate/jbf

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    References

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    1. Lange, Joe & Sack, Brian & Whitesell, William, 2003. " Anticipations of Monetary Policy in Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 889-909, December.
    2. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
    3. Geert Bekaert & Robert J. Hodrick & David Marshall, 1996. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Working Paper Series, Issues in Financial Regulation WP-96-3, Federal Reserve Bank of Chicago.
    4. Cyree, Ken B & Winters, Drew B, 2001. "Analysis of Federal Funds Rate Changes and Variance Patterns," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 24(3), pages 403-18, Fall.
    5. Mark Griffiths & Drew Winters, 1997. "On a Preferred Habitat for Liquidity at the Turn-of-the-Year: Evidence from the Term-Repo Market," Journal of Financial Services Research, Springer, vol. 12(1), pages 21-38, August.
    6. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
    7. Mark D. Griffiths & Drew B. Winters, 1997. "The Effect of Federal Reserve Accounting Rules on the Equilibrium Level of Overnight Repo Rates," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(6), pages 815-832.
    8. Cavanagh, Christopher L. & Elliott, Graham & Stock, James H., 1995. "Inference in Models with Nearly Integrated Regressors," Econometric Theory, Cambridge University Press, vol. 11(05), pages 1131-1147, October.
    9. Christiansen, Charlotte, 2003. "Multivariate Term Structure Models with Level and Heteroskedasticity Effects," Finance Working Papers 02-19, University of Aarhus, Aarhus School of Business, Department of Business Studies.
    10. Longstaff, Francis A., 2000. "The term structure of very short-term rates: New evidence for the expectations hypothesis," Journal of Financial Economics, Elsevier, vol. 58(3), pages 397-415, December.
    11. Downing, Chris & Oliner, Stephen, 2007. "The term structure of commercial paper rates," Journal of Financial Economics, Elsevier, vol. 83(1), pages 59-86, January.
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    Cited by:
    1. Andrade, Sandro C. & Barrett, W. Brian, 2011. "Can broker-dealer client surveys provide signals for debt investing?," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1170-1178, May.
    2. Jitmaneeroj, Boonlert & Wood, Andrew, 2013. "The expectations hypothesis: New hope or illusory support?," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 1084-1092.
    3. 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, vol. 35(5), pages 1202-1212, May.
    4. Zhu, Xiaoneng, 2011. "Revisiting the expectations hypothesis: The Japanese term structure and regime shifts," Journal of Economics and Business, Elsevier, vol. 63(3), pages 237-249, May.
    5. Kotomin, Vladimir, 2011. "A test of the expectations hypothesis in very short-term international rates in the presence of preferred habitat for liquidity," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(1), pages 49-55, February.
    6. Kopchak, Seth J., 2013. "The realized forward term premium in the repo market," Journal of Financial Markets, Elsevier, vol. 16(2), pages 253-278.
    7. Griffiths, Mark D. & Kotomin, Vladimir & Winters, Drew B., 2009. "Year-end and quarter-end effects in the term structure of sterling repo and Eurepo rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(5), pages 803-817, December.
    8. Wright, Jonathan H. & Zhou, Hao, 2009. "Bond risk premia and realized jump risk," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2333-2345, December.
    9. Tabak, Benjamin M. & Serra, Thiago R. & Cajueiro, Daniel O., 2009. "The expectation hypothesis of interest rates and network theory: The case of Brazil," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(7), pages 1137-1149.

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