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The empirical failure of the expectations hypothesis of the term structure of bond yields

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  • Lucio Sarno
  • Daniel L. Thornton
  • Giorgio Valente

Abstract

This paper tests the expectations hypothesis (EH) using US monthly data for bond yields spanning the 1952-2003 sample period and ranging in maturity from 1 month to 10 years. We apply the Lagrange multiplier test developed by Bekaert and Hodrick (2001) and extend it to increase the test power: (a) by introducing economic variables as conditioning information; and (b) by using more than two bond yields in the model and testing the EH jointly on more than one pair of yields. While the conventional bivariate procedure provides mixed results, the more powerful testing procedures suggest rejection of the EH throughout the maturity spectrum examined. ; Earlier titles: Testing the expectations hypothesis: some new evidence, New evidence on the expectations hypothesis of the term structure of bond yields

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2003-021.

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Date of creation: 2005
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Handle: RePEc:fip:fedlwp:2003-021

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Keywords: Rational expectations (Economic theory);

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