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The Term Structure of Euro-Rates: Some Evidence in Support of the Expectations Hypothesis

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Gerlach, Stefan
Smets, Frank

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Abstract

This paper studies one-, three-, six- and twelve-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 time-varying term premium, for many countries the expectations hypothesis is broadly compatible with the data.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1258.

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Date of creation: Oct 1995
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Handle: RePEc:cpr:ceprdp:1258

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Related research
Keywords: Expectations Hypothesis; Term Structure of Interest Rates;

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Find related papers by JEL classification:
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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  1. Shiller, Robert J. & Huston McCulloch, J., 1990. "The term structure of interest rates," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 13, pages 627-722 Elsevier. [Downloadable!] (restricted)
  2. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October. [Downloadable!] (restricted)
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  3. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Cowles Foundation Discussion Papers 667, Cowles Foundation, Yale University. [Downloadable!]
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  4. Hardouvelis, Gikas A, 1988. " The Predictive Power of the Term Structure during Recent Monetary Regimes," Journal of Finance, American Finance Association, vol. 43(2), pages 339-56, June. [Downloadable!] (restricted)
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  5. Jorion, Philippe & Mishkin, Frederic, 1991. "A multicountry comparison of term-structure forecasts at long horizons," Journal of Financial Economics, Elsevier, vol. 29(1), pages 59-80, March. [Downloadable!] (restricted)
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  6. N. Gregory Mankiw & Jeffrey A. Miron, 1986. "The Changing Behavior of the Term Structure of Interest Rates," NBER Working Papers 1669, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December. [Downloadable!] (restricted)
  8. 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, vol. 12(3), pages 453-465, September. [Downloadable!] (restricted)
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