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Are investors rational in international bond markets?

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Author Info
Chikashi Tsuji
Abstract

This paper tests the expectations hypothesis of the term structure of interest rates in seven major international markets from the perspective of behavioural finance. Using a cointegration and error correction approach, we find significant empirical support for the expectations hypothesis for only Germany and the USA. Therefore, investors' expectations are not rational, markets are inefficient and arbitrage between short-term and long-term bonds is limited in bond markets of Canada, the UK, France, Japan and Australia.

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Article provided by Taylor and Francis Journals in its journal Applied Financial Economics Letters.

Volume (Year): 1 (2005)
Issue (Month): 3 (May)
Pages: 169-175
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Handle: RePEc:taf:apfelt:v:1:y:2005:i:3:p:169-175

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  1. N. Gregory Mankiw & Lawrence H. Summers, 1984. "Do Long-Term Interest Rates Overreact to Short-Term Interest Rates?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(1984-1), pages 223-248. [Downloadable!]
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  2. Melino, Angelo, 1988. " The Term Structure of Interest Rates: Evidence and Theory," Journal of Economic Surveys, Blackwell Publishing, vol. 2(4), pages 335-66.
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  3. Shea, Gary S, 1992. "Benchmarking the Expectations Hypothesis of the Interest-Rate Term Structure: An Analysis of Cointegration Vectors," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 347-66, July.
  4. Wallace, Myles S & Warner, John T, 1993. "The Fisher Effect and the Term Structure of Interest Rates: Tests of Cointegration," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 320-24, May. [Downloadable!] (restricted)
  5. Josh Lerner & Antoinetter Schoar, 2002. "The Illiquidity Puzzle: Theory and Evidence from Private Equity," NBER Working Papers 9146, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. C. Karfakis & D. Moschos, . "The Information Content of the Yield Curve in Australia," Working Papers 185, University of Sydney, Department of Economics.
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