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Risk Premia and Long Rates in Ireland

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  • Cuthbertson, Keith
  • Bredin, Don

Abstract

Using a number of long-term maturities and monthly data, 1989-97, we provide a number of tests of the expectations hypothesis (EH) of the term structure. The main insight in this paper is the use of the excess holding period return to provide a proxy for a possible time-varying term premium. Nearly all previous studies using the VAR methodology have used only the spread and the change in (short) rates and they have ignored the excess holding period return. We find that we cannot reject the EH, but we do reject the presence of time-varying risk premia. Copyright © 2001 by John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 20 (2001)
Issue (Month): 6 (September)
Pages: 391-403

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Handle: RePEc:jof:jforec:v:20:y:2001:i:6:p:391-403

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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References

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  1. Bredin, Don & Cuthbertson, Keith, 2000. "The Expectations Hypothesis of the Term Structure: The Case of Ireland," Research Technical Papers 1/RT/00, Central Bank of Ireland.
  2. Kugler, Peter, 1988. "An Empirical Note on the Term Structure and Interest Rate Stabilization Policies," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 789-92, November.
  3. Shiller, Robert & Campbell, John, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Scholarly Articles 3221490, Harvard University Department of Economics.
  4. John Y. Campbell & Robert J. Shiller, 1988. "Cointegration and Tests of Present Value Models," NBER Working Papers 1885, National Bureau of Economic Research, Inc.
  5. 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 229-39, July.
  6. Mark P. Taylor, 1991. "Modelling the Yield Curve," IMF Working Papers 91/134, International Monetary Fund.
  7. Gregory, Allan W & Veall, Michael R, 1985. "Formulating Wald Tests of Nonlinear Restrictions," Econometrica, Econometric Society, vol. 53(6), pages 1465-68, November.
  8. John Y. Campbell, 1991. "A Variance Decomposition for Stock Returns," NBER Working Papers 3246, National Bureau of Economic Research, Inc.
  9. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
  10. Mankiw, N Gregory & Miron, Jeffrey A, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 211-28, May.
  11. Engsted, Tom, 1996. "The predictive power of the money market term structure," International Journal of Forecasting, Elsevier, vol. 12(2), pages 289-295, June.
  12. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February.
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Cited by:
  1. 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.
  2. Bredin, Don, 2001. "Alternative Tests of the Expectations Hypothesis of the Term Structure of Interest Rates," Research Technical Papers 2/RT/01, Central Bank of Ireland.

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