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A Re-examination of the Rational Expectations Hypothesis of the Term Structure: Reconciling the Evidence from Long-Run and Short-Run Tests

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  • Tzavalis, Elias
  • Wickens, Michael

Abstract

This paper explains the contradictory findings from long-run and short-run tests of the rational expectations hypothesis of the term structure. Recent research suggests that, while the long-run tests support the theory, the short-run tests do not. Our results which are based on US Treasury bills rates confirm this and suggest that the conflict in the evidence can be explained by the presence of a stationary, time-varying, term premium. Nevertheless, "news" about future changes in short rates are far more important than the risk premium in explaining interest rate movements at the short end of the term structure, and comprise the main source of the single factor explanation that emerges from our results. Copyright @ 1998 by John Wiley & Sons, Ltd. All rights reserved.

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  • Tzavalis, Elias & Wickens, Michael, 1998. "A Re-examination of the Rational Expectations Hypothesis of the Term Structure: Reconciling the Evidence from Long-Run and Short-Run Tests," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(3), pages 229-239, July.
    • Handle: RePEc:ijf:ijfiec:v:3:y:1998:i:3:p:229-39
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    9. Konstantinou, Panagiotis, 2004. "Term Structure Dynamics: A Daily View from the Hungarian Foreign Currency Deposits Markets," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 57(3), pages 315-331.
    10. Clements, Michael P. & Galvao, Ana Beatriz, 2004. "A comparison of tests of nonlinear cointegration with application to the predictability of US interest rates using the term structure," International Journal of Forecasting, Elsevier, vol. 20(2), pages 219-236.
    11. Theis Lange, 2009. "First and second order non-linear cointegration models," CREATES Research Papers 2009-04, Department of Economics and Business Economics, Aarhus University.
    12. Wickens, Michael R., 2014. "How did we get to where we are now? Reflections on 50 years of macroeconomic and financial econometrics," CEPR Discussion Papers 10197, C.E.P.R. Discussion Papers.
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    15. Pawel Milobedzki, 2012. "The Expectations Hypothesis of the Term Structure of LIBOR US Dollar Interest Rates," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 12, pages 5-18.
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