The Rational Expectations Hypothesis of the Term Structure: Reconciling the Evidence
AbstractThe main aim of this paper is to test the rational expectations hypothesis of the term structure (REHTS). Existing empirical studies of the REHTS provide inconsistent evidence. Tests based on the local expectations hypothesis (LEH) version of the REHTS tend to be far less supportive than those based on the return to maturity expectations hypothesis (RTMEH), especially when they concern the short-run implications of the hypothesis. This paper explains the differences between these alternative versions of the REHTS and estimates a number of models to try to explain the inconsistencies in previous results. Our conclusions are that the most probable cause of these differences is the failure to take account of the presence of a time-varying term premium. Once this is accounted for both short-run and long-run evidence is found to support the REHTS. Estimates of variance bounds of the term premium suggest that it may not vary sufficiently to be the sole explanation for the differences.
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Bibliographic InfoPaper provided by Exeter University, Department of Economics in its series Discussion Papers with number 9402.
Date of creation: 1994
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Term structure; rational expectations; cointegration; VAR.;
Other versions of this item:
- Elias Tzavalis & Michael Wickens, . "The Rational Expectations Hypothesis of the Term Structure: reconciling the evidence," Discussion Papers 95/33, Department of Economics, University of York.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
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- Tzavalis, E. & Wickens, M.R., 1995.
"Forecasting Inflation from the Term Structure,"
9519, Exeter University, Department of Economics.
- Theis Lange, 2009. "First and second order non-linear cointegration models," CREATES Research Papers 2009-04, School of Economics and Management, University of Aarhus.
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