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Time-Varying Term Premium in T-Bill Futures Rate and the Expectations Hypothesis

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  • Lee, Jae Ha
  • Jo, Hoje

Abstract

This paper examines time-varying term premium in the T-bill futures rate to determine its significance for the expectations hypothesis (EH). Similar to previous studies on the T-bill forward rates, our data reject the joint hypothesis of the EH and the rational expectations hypothesis (RE). Under the assumption of zero rational expectational error, we find a substantial variation of term premium in the futures rate over time. Furthermore, the lower bound of the expected term premium variance is significantly positive when the rational expectational error is allowed to be nonzero. These findings are inconsistent with the EH. In addition, a relatively high ratio of the lower bound of the expected term premium variance to the prediction error implies that the poor predictive power of the futures rate should not be attributed mainly to the market's rational expectational errors. Copyright 1996 by Kluwer Academic Publishers

Suggested Citation

  • Lee, Jae Ha & Jo, Hoje, 1996. "Time-Varying Term Premium in T-Bill Futures Rate and the Expectations Hypothesis," Review of Quantitative Finance and Accounting, Springer, vol. 6(2), pages 149-160, March.
    • Handle: RePEc:kap:rqfnac:v:6:y:1996:i:2:p:149-60
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    Cited by:

    1. George Halkos & Stephanos Papadamou, 2007. "Significance of risk modelling in the term structure of interest rates," Applied Financial Economics, Taylor & Francis Journals, vol. 17(3), pages 237-247.

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