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The term structure of Euro-rates: some evidence in support of the expectations hypothesis

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  • Stefan Gerlach
  • Frank Smets

    (European Central Bank (ECB))

Abstract

This paper studies 1, 3, 6 and 12-month Euro-rates for 17 countries using between 10 and 30 years of data. Term spreads contain information about future short-term rates in all 51 regressions that we estimate. Furthermore, in 35 cases we accept the expectations hypothesis. Using cross-sectional regressions, we estimate the variance of the term premium and the correlation of the term premium and the expected change in short rates. The estimates are compatible with existing informal estimates. We conclude that, despite the presence of a timevarying term premium, for many countries the expectations hypothesis is broadly compatible with the data.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 28.

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Length: 38 pages
Date of creation: Aug 1995
Date of revision:
Handle: RePEc:bis:biswps:28

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  1. N. Gregory Mankiw & Lawrence H. Summers, 1987. "Do Long-Term Interest Rates Overreact to Short-Term Interest Rates?," NBER Working Papers 1345, National Bureau of Economic Research, Inc.
  2. Jorion, Philippe & Mishkin, Frederic, 1991. "A multicountry comparison of term-structure forecasts at long horizons," Journal of Financial Economics, Elsevier, Elsevier, vol. 29(1), pages 59-80, March.
  3. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(5), pages 1062-88, October.
  4. Campbell, John Y & Shiller, Robert J, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(3), pages 495-514, May.
  5. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 173-224.
  6. Mankiw, N Gregory & Miron, Jeffrey A, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(2), pages 211-28, May.
  7. Gikas A. Hardouvelis, 1987. "The predictive power of the term structure during recent monetary regimes," Research Paper, Federal Reserve Bank of New York 8708, Federal Reserve Bank of New York.
  8. Bennett T. McCallum, 1994. "Monetary Policy and the Term Structure of Interest Rates," NBER Working Papers 4938, National Bureau of Economic Research, Inc.
  9. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 13(4), pages 509-528, December.
  10. Jones, David S. & Vance Roley, V., 1983. "Rational expectations and the expectations model of the term structure : A test using weekly data," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 453-465, September.
  11. Shiller, Robert J. & Huston McCulloch, J., 1990. "The term structure of interest rates," Handbook of Monetary Economics, Elsevier, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 13, pages 627-722 Elsevier.
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